Dollar carry trade

Checked October 2026

Dollar carry buys a basket of foreign currencies when their interest rates sit above the US rate, and sells that basket when they sit below. Lustig, Roussanov and Verdelhan published it in the Journal of Financial Economics in 2014. Backtoast ran it. The standard version made 1.5% a year at +7.64% a trade, but failed our test on trade frequency and outlier dependence.

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Dollar carry trade

Once a month the rule compares the US policy rate with the average rate of ten developed currencies. If the foreign average is higher it buys all ten against the dollar, and if it's lower it sells all ten, a tenth of the account each, and holds for a month. So it's one bet on the dollar against the rest, switched by the rate gap.

G10 currency carry ranks the currencies and holds the top three against the bottom three instead.

When it works

Dollar carry is one bet on the US rate gap, so it holds one side for months and earns while that gap stays wide and steady. Lustig, Roussanov and Verdelhan found its returns were uncorrelated with ranked carry, and read them as pay for shorting the dollar in bad times. Traders run it as a second carry signal next to a ranked carry trade.

Origins

Lustig, Roussanov and Verdelhan reported 5.60% a year after bid-ask costs from November 1983 to June 2010. The paper uses one-month forward rates, and the run used central bank policy rates in their place, from late 2021 to October 2026.

The run is Backtoast's, from 29 October 2026, after costs.