①The MSCI Emerging Markets Currency Index reached a record high in July this year, with an increase of over 6% year-to-date, potentially marking its best annual performance since 2017; ②Traders, fund managers, and analysts interviewed generally expect this trend to continue into next year.
Cailian Press, December 15 (Edited by Xiaoxiang) Few may notice a rather obscure corner of the global foreign exchange market in their daily trading — the Hungarian forint. However, trading volume in this long-niche emerging market currency has doubled since U.S. President Trump took office in January this year. Following Trump’s announcement in April of implementing a ‘Liberation Day’ policy of comprehensive import tariffs, traders’ interest in this currency has continued to grow.
Such trading growth is not a fleeting phenomenon — many traders, strategists, and hedge funds note that they are now busy navigating various remote corners of the nearly $10 trillion daily turnover global forex market.
Year-to-date, the Hungarian forint has appreciated by approximately 20% against the U.S. 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: The MSCI Emerging Markets Currency Index hit a record high in July this year, with gains exceeding 6% year-to-date, potentially marking its best annual performance since 2017. Traders, fund managers, and analysts widely anticipate that this trend will continue into next year.
The backdrop to these market movements is the heightened volatility and sustained weakening of the U.S. dollar, prompting investors to reassess their dollar exposure and question long-held assumptions about the trajectory and status of the dollar. At the same time, as investors diversify their asset allocation towards markets outside the U.S., 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 U.S. assets while avoiding emerging market assets, but this is now reversing.’
Emerging market currencies outshine G10 currencies this year
For Elina Theodorakopoulou, Portfolio Manager of Manulife Financial’s Emerging Markets Debt, 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.
Analysts said that the fragmentation of global trade led by the United States, geopolitical turbulence, and divergent central bank policies are expected to continue driving exchange rate volatility. Against this backdrop, foreign exchange investors, including hedge funds, are experiencing constantly shifting profits and losses, while for governments of emerging economies, local currency appreciation and capital inflows are also having significant economic impacts – potentially weakening their export competitiveness but simultaneously enhancing their borrowing and debt repayment capabilities.
Overall, the foreign exchange market in 2025 has been like a roller coaster, with volatility in developed market currencies only beginning to ease after spiking to a two-year high in April. The stabilization of the market has also created a more favorable environment for ‘carry trades’ – borrowing low-interest-rate currencies to invest in high-interest-rate ones.
According to people familiar with the matter, EDL Capital, a hedge fund managing $1 billion in assets, has risen 28% this year, benefiting from its gains at the beginning of the year and during the ‘Liberation Day’ period in April – its short position on the US dollar significantly contributed to the fund’s returns.
Data compiled by research firm Vali Analytics shows that trading in emerging market currencies has been a cash cow for banks this year, generating substantial profits – the world’s top 25 banks earned nearly $40 billion through emerging market currency trading in the first nine months of the year, marking their best performance on record.
The data company’s analysis also showed that this figure is more than double the $19 billion in revenue banks generated from G10 currency trading. The G10 currencies include ten major global currencies such as the US dollar, Japanese yen, British pound, and euro.
Samer Oweida, Global Head of FX and Emerging Markets Trading at Morgan Stanley, stated, ‘Finding profitable opportunities in foreign exchange trading this year – especially within G10 currencies – has consistently been challenging. However, if investors remain committed to forex trading, they tend to shift toward higher-yielding structured investment opportunities in emerging markets.’
Will the strength persist into next year?
Currently, slightly more than half of the 14 top currency traders, hedge fund managers, and analysts interviewed by the media believe that the increasing attractiveness of emerging market currencies will be a key trend continuing into 2026.
They pointed out that in an era where the dominance of the US dollar is no longer inevitable, increased hedging demand and heightened volatility may also persist.
Although the US dollar has rebounded somewhat from its sharp decline over the past few months – the dollar index recorded its largest drop since the early 1970s in the first half of this year, falling nearly 11% cumulatively – analysts generally expect that Federal Reserve rate cuts will lead to further dollar weakness.
Data from LSEG shows that traders are pricing in two more Fed rate cuts (of 25 basis points each) for the coming year.
This backdrop is crucial for many emerging market currencies — as Fed rate cuts could drive greater capital inflows into these economies. For some currencies, active interest rate differentials have also added upward momentum.
As shown in the chart below, the Hungarian forint, Mexican peso, and Brazilian real are among the best-performing emerging market currencies this year.
These countries boast prudent central banks and high interest rates, with Brazil’s rates currently at their highest level in 20 years — reaching 15%. Additionally, local currency and bond markets are easily accessible.
Of course, a weaker dollar this year has not benefited all emerging market currencies. For instance, sluggish trade and investment flows once pushed the Indian rupee to record lows, while concerns over central bank independence and political instability weighed on the Indonesian rupiah…
However, looking at the broader trend, Nikolas Skouloudis, portfolio manager at Amia Capital, which oversees approximately USD 1.4 billion in assets, stated: “Emerging markets as a whole are seeing strong inflows, covering both local and external (bond markets), and I don’t believe this trend will reverse anytime soon.”
