A surge in the US dollar and a series of negative developments have triggered the biggest decline in emerging market currencies in two years. Over the past two and a half months, a JPMorgan index tracking EM currencies has fallen more than 5%, heading towards its largest quarterly drop since September 2022. The weakness has been widespread, with at least 23 currencies tracked by Bloomberg losing value against the dollar this quarter. The dollar has surged since late September, fueled by expectations that President-elect Donald Trump will impose trade tariffs and loosen fiscal policy upon taking office.
The greenback has become a major driver of weakness for EM currencies, with Trump’s tariff announcements—including 25% levies on imports from Mexico and Canada, and an additional 10% on Chinese goods—pushing the Mexican peso down 2.1% this quarter and the Chinese renminbi by 3.7%. Broader declines have been seen in currencies like the South African rand, which has fallen 2.4% since September. Even with the added interest from holding local assets, only high-risk countries like Turkey and Argentina have seen positive returns in their currencies this quarter.
The broader sell-off has also affected so-called “carry trades,” where investors borrow in low-interest currencies like the dollar or yen to buy higher-yielding EM currencies. A popular EM carry trade index by Citi has yielded only 1.5% this year, compared to 7.5% in 2023. This marks a continued downward trend, with JPMorgan’s EM currency gauge on track for its seventh consecutive annual decline. Analysts highlight that the Mexican peso’s struggles are largely due to tariff concerns, but other EM currencies face additional country-specific challenges.
The situation is more complex, with emerging markets grappling with domestic issues. In China, worries over the slowing economy and continued monetary easing have put pressure on its currency. Meanwhile, Brazil’s real has weakened to record lows amid fiscal concerns, including a government pledge to find significant cost savings that failed to ease doubts about public finances. The South Korean won has also been impacted after political unrest related to martial law. Additionally, the rising US dollar has pressured currencies in euro-linked EM countries, such as Poland and Hungary.
Overall, the weakening of EM currencies has revived the “Tina” (There Is No Alternative) investment narrative, as the US remains the dominant choice for investors amid the lack of strong economic stories in emerging markets.