Emerging Market Currencies Under Pressure as Dollar Strengthens
The Brazilian real, Turkish lira, and South African rand hit multi-month lows as the strong dollar and elevated US yields drain capital from developing economies.
Priya Sharma
Emerging Markets Analyst
A basket of emerging market currencies fell to its lowest level in three months against the US dollar on Monday, as the greenback's strength — fueled by robust US economic data and hawkish Fed expectations — triggers capital outflows from developing economies.
The Brazilian real weakened 1.2% to 5.95 per dollar, its worst level since October 2025, amid growing fiscal concerns after Brazil's government announced a larger-than-expected 2026 budget deficit target. The Turkish lira fell 0.8% to 38.20, while the South African rand dropped 0.9% to 19.45.
The MSCI Emerging Market Currency Index has declined 3.2% year-to-date, compared to a 2.8% gain for the DXY dollar index. The divergence reflects a fundamental shift in rate expectations, with US rates now expected to remain higher for longer while EM central banks face pressure to cut.
"The carry trade is being squeezed," said Priya Sharma, emerging markets analyst. "With the Fed on hold and US yields elevated, the reward for holding EM risk is simply not compensating for the currency depreciation risk."
Notable exceptions include the Indian rupee, which has held relatively steady at 86.20 per dollar thanks to strong foreign equity inflows, and the Mexican peso, which benefits from nearshoring tailwinds and a hawkish Banxico.
Emerging market sovereign debt spreads have widened 15bps month-to-date, with the JP Morgan EMBI Global index at 385bps over US Treasuries.