Since early October, emerging market currencies have been depreciating against the U.S. dollar. Differentials in growth, interest rates and expectations on policy changes by the Trump administration are all contributing to the decline.
Whether the depreciation is taking place in economies that have currency pegs like China, in countries exiting pegs like India or in those with flexible exchange rates like Brazil, it is clear that this year will be one of adjustment to more aggressive trade policies in the U.S.
One difference between a trade skirmish and a trade war is the type of beggar-thy-neighbor currency depreciation that typically follows tit-for-tat increases in tariffs.
Economies with inadequate capital buffers, economic imbalances featuring large import volumes or with weak financial systems will be at risk of larger-than-anticipated currency depreciations.
Read RSM’s global economic outlook for 2025 in the latest issue of The Real Economy.
Given the focus on the export of goods by Chinese-owned firms, it naturally follows that the focus this year will be on those economies, mostly in Asia, with substantial investment by Beijing.
In particular, the emphasis in other countries on transshipments of lower value-added goods, mostly from Chinese-owned firms, means that global investors should anticipate currency valuations in emerging markets to face further volatility.
