The surge of the US dollar drags down emerging market currencies, which are expected to record the largest quarterly decline in two years

The US dollar exchange rate continues to strengthen, triggering a large-scale decline in emerging market currencies. Over the past two and a half months, JPMorgan's emerging market currency index has fallen by more than 5%, marking the largest quarterly decline since September 2022, and is set to record a seventh consecutive year of decline. This round of depreciation in emerging market currencies is widespread, with at least 23 currencies experiencing declines against the US dollar. Among them, the South African rand, as a representative indicator of emerging market sentiment, has depreciated by about 2.4% since the end of September. The Brazilian real has also fallen to a historic low, breaking below the threshold of 6 reals to 1 US dollar for the first time. Some analysts believe that one of the major factors driving the strength of the dollar comes from the "Trump trade" frenzy that began at the end of September, with the market widely expecting Trump to be elected as US president and to raise tariffs and implement loose fiscal policies. Due to concerns over the tariff policies of a Trump administration, the Mexican peso has also depreciated by 2.1% this quarter. The strengthening dollar not only poses depreciation risks for emerging market currencies but also triggers large-scale unwinding of arbitrage trades. For decades, arbitrage traders have invested in higher-yielding emerging market currencies using low-interest-rate dollars. The emerging market currency arbitrage portfolio tracked by Citibank shows that its return this year is only 1.5%, far below last year's 7.5%. Macquarie's global foreign exchange and interest rate strategist Thierry Wizman stated: "A series of bad news has emerged in emerging markets." The general weakness of emerging market currencies has led to a resurgence of investment narratives similar to TINA (There Is No Alternative to equities), emphasizing "no alternative but the US." Wizman from Macquarie remarked: "Today, no emerging market can stand out due to strong economic performance."