Deutsche Bank: Yield to Remain Dominant Driver for Currency Markets in 2026

The search for yield is set to remain the dominant force in foreign exchange markets through 2026, with carry trades likely to continue performing well amid a stable global economy, according to a Deutsche Bank AG report published Friday.

George Saravelos, the bank's head of currency strategy, wrote that yield has been the main determinant of currency movements this year, overshadowing major geopolitical and market events.

Yield Overrides Market Volatility

According to the report, risk-adjusted carry has been the most significant factor for FX performance in 2026. This trend has persisted despite a war in the Middle East, leadership changes at the U.S. Federal Reserve, and significant valuation shifts in technology stocks.

The note highlights that the market's hawkish repricing of Fed policy has been the single most important positive driver for the U.S. dollar. However, for the dollar to rally more broadly, Saravelos suggests the market would need to price in 75 to 100 basis points or more in rate hikes, which would re-establish the greenback's status as a high-yielder.

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Major Currency Outlook

Deutsche Bank provided specific views on several major currencies based on the prevailing yield environment:

• Euro (EUR): The bank does not see a strong case for further declines in the euro, citing potential upside risks to European growth expectations.
• Japanese Yen (JPY): The yen continues to face pressure from its low front-end yields relative to other G10 currencies. A potential catalyst for strength could come from Japanese efforts to promote domestic investment, with the bank citing Japan’s 2014 Government Pension Investment Fund reform as a historical example of how domestic flow changes can move FX markets.
• Swiss Franc (CHF): For investors looking to execute carry trades, Deutsche Bank stated a preference for using the Swiss franc over the yen as a funding currency.