Emerging Market Currencies on the Rise
The MSCI Emerging Markets Currency Index has reached a record high, with a year-to-date increase of over 6%, potentially marking its best annual performance since 2017. Traders, fund managers, and analysts expect this trend to continue into next year. One of the key drivers of this trend is the heightened volatility and sustained weakening of the US dollar, prompting investors to reassess their dollar exposure and question long-held assumptions about the trajectory and status of the dollar.
A Shift in Global Trade
The Hungarian forint, a long-niche emerging market currency, has seen its trading volume double since US President Trump took office in January. Following Trump’s announcement of implementing a ‘Liberation Day’ policy of comprehensive import tariffs, traders’ interest in this currency has continued to grow. This growth is not a fleeting phenomenon, as many traders, strategists, and hedge funds are navigating various remote corners of the nearly $10 trillion daily turnover global forex market.
Performance of Emerging Market Currencies
The Hungarian forint has appreciated by approximately 20% against the US dollar, on track for its best annual performance in nearly 25 years, making it one of the top-performing emerging market currencies in 2025. The broader benchmark for emerging market currencies has also performed strongly, with the MSCI Emerging Markets Currency Index hitting a record high in July this year, with gains exceeding 6% year-to-date.
Drivers of the Trend
The backdrop to these market movements is the heightened volatility and sustained weakening of the US dollar. As investors diversify their asset allocation towards markets outside the US, they are betting on currency appreciation in developing countries from South Africa to Hungary. Jonny Goulden, Head of JPMorgan’s Emerging Markets Fixed Income Strategy Research, stated, "We believe the 14-year bear market cycle for emerging market currencies may have turned. This stems from a shift in the dollar cycle — previously, global traders held large amounts of US assets while avoiding emerging market assets, but this is now reversing."
Emerging Market Currencies Outshine G10 Currencies
Elina Theodorakopoulou, Portfolio Manager of Manulife Financial’s Emerging Markets Debt, noted that the biggest surprise this year has been that almost all price volatility in the foreign exchange market was driven by events in developed economies. "Emerging market currencies have gained popularity this year because they are not the drivers of volatility," said Theodorakopoulou.
The Future of Emerging Market Currencies
Analysts expect that the fragmentation of global trade led by the US, geopolitical turbulence, and divergent central bank policies will continue driving exchange rate volatility. Against this backdrop, foreign exchange investors, including hedge funds, are experiencing constantly shifting profits and losses. For governments of emerging economies, local currency appreciation and capital inflows are having significant economic impacts – potentially weakening their export competitiveness but simultaneously enhancing their borrowing and debt repayment capabilities.
Conclusion
In conclusion, the emerging market currencies have been on the rise, driven by the weakening of the US dollar and the shift in global trade. The Hungarian forint, in particular, has seen significant growth, with its trading volume doubling since US President Trump took office. As investors continue to diversify their asset allocation towards markets outside the US, emerging market currencies are likely to remain a key trend in the foreign exchange market. With the US dollar expected to weaken further, emerging market currencies such as the Hungarian forint, Mexican peso, and Brazilian real are likely to continue their upward momentum, making them an attractive investment opportunity for traders and investors.
