Sharp currency movements have brought emerging markets into the focus of global investors. Trading volume in long-niche currencies like the Hungarian forint has more than doubled since US President Donald Trump took office in January and the subsequent “Liberation Day” tariffs. According to market participants, this increase is not temporary.
The forint is poised for its best performance in a quarter century, having gained approximately 20% against the dollar this year. On a broader scale, the MSCI Emerging Markets Currency Index hit a record high in July and is heading towards its strongest year since 2017. Most investors who spoke to Reuters expect this trend to continue into 2026. The weakening dollar and increased volatility are pushing investors to diversify away from US assets, with valuation appeal in countries ranging from South Africa to Hungary. According to Jonny Goulden of JPMorgan, the 14-year bear cycle in emerging market currencies may be over. The IMF issued a Risk Warning. The IMF highlighted risks in foreign exchange markets in its latest financial stability report. The fact that almost half of global FX volume is channeled through a limited number of large banks increases liquidity risk during periods of stress. BIS data shows that foreign exchange volumes have increased by approximately 30% in the last three years. After peaking in 2025, developed country currency volatility calmed down, making carry trades attractive again.
For banks, EM foreign exchange trading has become a profitable area. In the first nine months, the EM foreign exchange revenues of the 25 largest banks reached approximately $40 billion; this is more than double the revenue from G10 currencies.
Morgan Stanley’s Samer Oweida says that finding opportunities at the G10 is becoming more difficult, and investors are turning to high-yield EM stories.Not Everyone Won
Weak trade flows pushed the Indian rupee to record lows, while political uncertainties weighed on the Indonesian rupiah. In contrast, the dollar, after falling nearly 11% in the first half of the year, has recovered, but analysts predict that further Fed interest rate cuts could weaken the dollar again.
This backdrop has accelerated inflows into many EM currencies. The Mexican peso and Brazilian real are among the best performers of the year. In Brazil, the policy interest rate is at a 20-year high of 15%, and access to markets is easy. Nikolas Skouloudis from Amia Capital notes that strong inflows into the broader EM universe continue and he is not betting on a reversal in the near term.
