The weakening dollar helps kick off foreign exchange arbitrage trading with a good start, and Wall Street bets on the continued rise of emerging currencies.

Since the beginning of 2026, investors have gained significant returns through "arbitrage trading" by selling US dollars and buying high-yield emerging market currencies. Several top Wall Street investment bank strategists predict that, against the backdrop of continued pressure on the US dollar due to Trump's policies, this strategy is expected to further capitalize on last year's strong 18% rise. Data shows that an index tracking the arbitrage returns of eight emerging market currencies has risen 1.3% so far this year. Strategists from Morgan Stanley, Bank of America, and Citigroup all believe that the returns recorded in 2025 (the largest annual increase since 2009) may just be the beginning of a new bull market. As of Monday, the index reached 291 points, close to about 5% away from the historical high set in 2011. From the South African rand to the Colombian peso, several emerging market currencies are currently hovering near multi-year highs. Analysts point out that the attractiveness of arbitrage trading comes not only from exchange rate appreciation but also from the high real interest rate levels still present in developing countries. Despite signs of slowing inflation, many emerging market central banks are still cautious and slowly easing policies, maintaining a high interest rate differential environment. James Lord, head of emerging market strategy at Morgan Stanley, said: "We are focusing on countries where monetary policy remains tight and central bank credibility is high." Trades he is optimistic about this year include the Brazilian real, Turkish lira, and Czech koruna. Latin American currency-related strategies are among the strongest performers this year. The Brazilian real has already accumulated a return of 4.3% since the beginning of 2026, continuing to strengthen from last year's 23.5% rise. Despite Brazil's inflation gradually falling to near the central bank's target range, the country's interest rates remain high at 15%, providing strong support for arbitrage funds. Citigroup strategists also recommend investors to go long on the Brazilian real against the US dollar and see opportunities for arbitrage in the Turkish lira. However, not all emerging market currencies are benefiting from this trend. The Indian rupee, as the worst-performing currency last year, continues to decline this year, with a cumulative decline of about 2% in terms of arbitrage returns. The Indonesian rupiah also puts investors in a loss situation. Data shows that the strongest year for arbitrage trading in history occurred in 2003, with an annual return of 25%. But to replicate such a "bumper year," investors still need to see the US dollar continue to weaken while keeping emerging market exchange rate fluctuations moderate. The market is closely watching JPMorgan's foreign exchange volatility index, which has risen to a three-week high after a long period of calm. Bank of America strategist Alex Cohen predicts that arbitrage trading will continue to outperform other strategies, but only if market volatility remains under control. "This is indeed a big 'if'," he warned, as unforeseen risks like geopolitical conflicts could trigger market turbulence at any moment.