(Bloomberg) -- Emerging-market currencies are pulling off an unlikely comeback at the start of 2025 as investors grow bullish amid signs of a turning point in the US dollar.
Ninety One Plc. is forecasting developing-world currencies will gain against the greenback, reversing a call made last year. Lazard Asset Management turned positive on the asset class this month. The about-face comes as some currencies, including the Brazilian real and Colombian peso, post year-to-date gains of more than 6%, powered by investors seeking to harvest their rich yields. Currencies from the Polish zloty to South African rand are also rallying, and positioning data compiled by Citigroup Inc. shows appetite for EM currencies is at the highest level since October.
Fueling those gains is a turn in the dollar, which has faltered on signs that US tariffs promised by President Donald Trump may be less severe than expected. Nascent US growth worries and prospects for fiscal stimulus in Europe are dragging the greenback lower as well. For many traders, the dynamic is reminiscent of the start of Trump’s first term, when emerging markets surged as the dollar turned following a sharp-post election rally.
“The setup right now looks quite similar to what it was in 2017 — when Trump did start to talk about tariffs but they took a long time to come,” said Grant Webster, co-head of emerging-market sovereign debt and currencies at Ninety One, in an interview. “It does seem like some of the big underpinnings for the dollar are starting to turn.”
Of course, that year — which saw a gauge of emerging currencies rally about 11% — was followed by a jarring shift as Trump’s administration turned its tariff talk into reality in 2018, sparking a selloff in developing-nation currencies.
The MSCI EM currency index trimmed year-to-date gains on Thursday after Trump said tariffs against Mexico and Canada will go into effect on March 4. It’s still up 1.1% this year, while a Bloomberg gauge of the dollar is down 1.3%.
For Arif Joshi, Lazard’s co-head of emerging-market debt, the calculus shifted this year with Trump’s more measured approach to trade policy. He estimates the current tariff plan will result in roughly a 2% effective increase in US levies versus the rest of the world – far below the double-digit options floated last year. That could prompt a reversal of the dollar rally seen between September and early January, he said.
Recent market data suggests optimism on emerging currencies is building. Traders’ appetite to hold emerging-market currencies has reached its highest point since the US election, according to a gauge compiled by Citi. The bank’s EM FX Positioning Indicator has climbed to levels not seen since October 2024, with 15 out of 23 tracked currencies seeing net buying in the past month.
“Both hedge funds and real money have been increasing their exposure to EM currencies in recent weeks,” said Kristjan Kasikov, global head of foreign exchange quantitative investor solutions at Citi.
High-Yielders
Currencies of countries with high interest rates, particularly in Latin America, have led the charge as carry traders seek to take advantage of the higher yields. Investors buying an evenly-split basket of the Colombian and Chilean pesos and the Brazilian real versus the US dollar have nabbed a roughly 7.3% total return in the first 40 sessions of the year. That’s the highest since 2022 and the second-most in more than a decade.
It’s still a bold bet. The impact of Trump’s economic policy agenda on global interest rates and the path of the dollar remains unclear. Plus, the carry strategy hit a wall last year, when the collapse of yen-funded carry positions roiled trading across developed and emerging economies.
As a result, investors in the Latin American carry trade have been less likely to fund positions using the yen. Instead, many are holding shorts against the dollar and other Asian currencies, said Alejandro Cuadrado, head of global FX and Latin America strategy at Banco Bilbao Vizcaya Argentaria SA in New York.
So far this year, swings in exchange rates have been subdued and well below the levels seen around the US election in November. The ICE BofA MOVE Index — a measure of expected fluctuations in US yields, which can have broad impacts on emerging-market debt and currencies — is trading near its lowest mark in almost three years.
For 2025, BBVA is recommending going long a basket of Latin America currencies with an underweight to the Mexican peso, while shorting a basket of Asian currencies — a bet that aside from Mexico and a short-lived migration spat with Colombia, the region remains mostly off the radar in the tariff battle.
Going into 2025, expectations were for exceptional US growth, while there were significant worries about tariffs and very few indications in Europe that growth was likely to increase, said Lazard’s Joshi.
“Each one of those building blocks has deteriorated this year,” he said.
--With assistance from Zijia Song, Carter Johnson and Maria Elena Vizcaino.
(Updates with comments from Trump and market reaction in sixth paragraph.)
