Growth woes to erode emerging market FX gains in coming months

BENGALURU/JOHANNESBURG – Emerging market currencies are poised to shed some of their recent gains over the next three months as mounting economic gloom drives investors out of riskier assets, even with the US dollar holding steady, a Reuters poll showed.

Fueled by a weaker dollar and a temporary easing in trade tensions, the broader emerging market currency index has climbed roughly 5% in 2025, marking a dramatic rebound from last year’s slump.

But that rally is likely finished as recession fears intensify with US tariff shockwaves threatening to ripple across economies, amplifying uncertainty and weighing heavily on sentiment across developing markets.

Almost all EM currencies covered in the April 30–May 6 poll of over 50 strategists are expected to give back at least part of their recent gains over the next three months, with a few projected to erase them entirely.

The broader foreign exchange poll indicated the greenback is likely to stay flat in the near term against major currencies.

“EM assets face growing risks from slowing global growth. Global growth forecasts have been revised sharply lower, and tariffs threaten to add more pain, as reflected in recent IMF forecasts,” said Mitul Kotecha, head of FX & EM macro strategy Asia at Barclays.

“We also maintain our view of gradual CNY depreciation due to the impact of tariffs, ongoing deflationary pressures, weak growth, and capital account pressures, which may act as a drag on other Asian currencies, contributing to our view of expected underperformance of Asian FX versus other EM regions.”

In a separate poll, most economists warned the global economy risks sliding into recession this year, with many citing US President Donald Trump’s tariffs as a major blow to business sentiment.

The Chinese yuan, Indian rupee, and South African rand are expected to pare gains made over the past four months and lose around 1.0%-3.0% in three months.

Expectations for the yuan to give up all its year-to-date gains likely stem from the potential expiration of the tariff reprieve in July amid ongoing growth challenges in China.

The Korean won, Thai baht, and Turkish lira are expected to weaken around 4.0% by end-July.

In the same time period the Brazilian real, which has gained more than 8% this year, is forecast to drop around 1%. The Mexican peso is predicted to fall about 2.5%.

“The hit to investor confidence coming from other spheres of US policy-making might also trigger waves of risk aversion, leaving EM FX vulnerable for the time being,” noted Anezka Christovova at J.P. Morgan.

(Reporting by Devayani Sathyan and Vuyani Nbada; Polling by Jaiganesh Mahesh, Indradip Ghosh, Veronica Khongwir, and Vijayalakshmi Srinivasan; Editing by Alexandra Hudson)