Investors are swapping dollars for emerging-market currencies in 2026, building on last year’s 18% rally—the strongest since 2009. Strategists at Morgan Stanley and Bank of America see more gains ahead, with the strategy proving lucrative so far. This shift reflects a broader search for yield amid shifting global monetary policy.

The rally’s momentum stems from expectations that the Federal Reserve will pause rate hikes while other central banks tighten. This divergence makes carry trades—borrowing in low-yield currencies to invest in higher-yielding ones—especially attractive. For investors, the strategy offers a way to capitalize on yield spreads and potential currency appreciation.

What to watch next is whether the rally can sustain itself without a sharp reversal in the dollar. Geopolitical risks and central bank actions could influence flows. For Morgan Stanley and BofA, their bullish calls signal confidence in a continued risk-on environment for emerging markets.