Story
Yield Is Key Driver for FX Markets in 2026, Deutsche Bank Says
Summary
Deutsche Bank strategists argue that interest rate differentials are the dominant force in currency markets this year, making carry trades attractive in a stable global economy.
The search for higher returns is the primary driver of foreign exchange markets this year, with carry trades performing well amid a stable global economic environment, according to a note published Friday by Deutsche Bank AG.
The Dominance of Yield
George Saravelos, head of currency strategy at Deutsche Bank, wrote that yield has been the most significant factor influencing currency movements in 2026. The strategist noted that risk-adjusted carry has been the dominant theme, even in the face of major events including a war in the Middle East, leadership changes at the Federal Reserve, and large valuation shifts in technology stocks.
The stable macroeconomic backdrop has allowed interest rate differentials to guide currency flows, making the carry trade—borrowing in a low-yield currency to invest in a higher-yielding one—a continued focus for market participants.
Outlook for Major Currencies
AdDeutsche Bank provided specific views on several key currency pairs, highlighting how policy and growth expectations are shaping the landscape.
- US Dollar (USD): The dollar's strength has been primarily supported by a hawkish repricing of Federal Reserve policy. According to Saravelos, a more substantial and broad-based dollar rally would likely require markets to price in 75 to 100 basis points or more in rate hikes, which would re-establish the greenback's high-yielder status.
- Euro (EUR): The bank does not see a strong reason for the euro to fall further, pointing to potential upside risks for European growth expectations that could support the common currency.
- Japanese Yen (JPY): The yen continues to face pressure from its low front-end yields relative to its G10 peers. However, the report noted that Japanese efforts to encourage domestic investment could eventually strengthen the currency, referencing the 2014 Government Pension Investment Fund reform as a historical example of how domestic flow changes can impact FX markets.
For investors executing carry trades, Deutsche Bank stated a preference for using the Swiss franc (CHF) as a funding currency over the Japanese yen.