Emerging Market Currencies Gain on Softer Trump Tariff Rollout
Emerging market currencies are rallying in the first week of President Donald Trump's second term, buoyed by a less aggressive tariff implementation and no additional levies on Chinese imports.
The benchmark index for developing-nation currencies is poised to gain 1.1% this week, its best weekly performance since July 2023. Trump's comments suggesting a reluctance to impose tariffs on China boosted Asian currencies on Friday.
"It's more of a relief rally," said Alvin Tan, head of Asian FX strategy at Royal Bank of Canada in Singapore. "The market is relieved that the worst-case scenario" regarding US tariffs "appears to be fading away."
After their worst quarterly drop since September 2022 in late 2024, emerging currencies are recovering. Investors had priced in expectations of a trade war and a more hawkish Federal Reserve due to inflationary pressures in the US.
Emerging markets in Europe and Latin America are leading the gains, with the Polish zloty and Brazilian real rising nearly 3% this week.
Emerging markets stocks also reached a five-week high on optimism about the tariff situation. The MSCI Emerging Markets Index gained 0.7% on Friday and is set to climb 1.8% this week.
Uncertainty remains high, however, as Trump's policy agenda remains unclear. JPMorgan Chase & Co.'s gauge of emerging-market currency volatility has eased but remains elevated.
"EM FX has been given a reprieve for now," said Eugenia Victorino, head of Asia strategy at Skandinaviska Enskilda Banken AB in Singapore. "However, the threat of a resumption of trade wars will limit excessive appreciation for EM currencies."