The recent sharp appreciation of the Japanese yen has diminished its dependability as a funding currency, prompting investors to explore the Swedish krona and Swiss franc as prime candidates for carry trade financing. Russell Investments Ltd. and Allianz Global Investors are favoring the Swiss franc, citing the growing divergence in monetary policy between Switzerland and Japan, while strategists at JPMorgan recommend the Swedish krona and Canadian dollar as equally attractive alternatives.

These currencies are all vying for the position the yen once held in carry trades, where investors borrow in a low-yielding currency to fund purchases of higher-yielding assets. For decades, the yen has been the go-to funding currency for such trades, but its appeal is waning as Japanese bond yields climb and coordinated U.S.-Japan intervention to support the yen underscores a policy push for higher interest rates and a stronger currency.

Where to begin

Van Luu, global head of fixed income and currency solutions at Russell Investments Ltd., notes that "investors still want to participate in carry trades, but the truly interesting question now is what currency to use on the funding side." He points out that Japan's two interventions this year to prop up the yen, coupled with signals preparing investors for further rate hikes, effectively indicate a desire for yen strength.

In contrast, Switzerland is expected to maintain zero interest rates until the end of 2027 and appears content with a weaker franc to support its exporters. Luu adds, "If investors shift the funding currency for carry trades away from the yen, the Swiss franc becomes the most attractive option from both valuation, monetary policy, and exchange rate policy perspectives."

Why only a few currencies matter

Yield performance confirms that yen-funded carry trades are losing their luster. For instance, selling the yen to buy the Australian dollar, the highest-yielding currency in the G-10, has generated a 1.3% loss since July, compared to a 9% gain in the first half of the year. By contrast, carry trades funded with the Swiss franc have delivered a total return of 14% since the start of 2026.