Emerging market currencies get relief rally from softening Trump threats

In the first week since Donald Trump returned to the White House, emerging-market currency traders are celebrating the small wins.

The absence of tariffs on Chinese imports, for now, was enough to fuel gains in developing-world currencies, leaving a benchmark index on track to climb 1.1% this week, its best performance since November 2023. Trump’s comments hinting he would rather not impose levies on China were further welcomed by investors, who hunted for hard-hit Asian currencies on Friday.

“It’s more of a relief rally,” said Alvin Tan, head of Asian FX strategy at Royal Bank of Canada in Singapore. “The market is relieved that the worst-case scenario of maximalist US tariffs that Trump had promised in his campaign appears to be falling by the wayside.”

Emerging currencies are rebounding after suffering their worst quarterly drop since September 2022 in the final months of 2024 as traders priced expectations of a widespread trade war and a more hawkish Federal Reserve amid inflationary pressure in the US. Currencies in emerging Europe and Latin America led gains this week, with the Polish zloty and Brazilian real climbing almost 3%.

Still, investors remain weary as the uncertainty over US policies remains high. While JPMorgan Chase & Co.‘s gauge of emerging-market currency volatility has eased, it remains at its highest since August.

On Thursday, Trump reiterated the Feb. 1 date for 25% levies on Canadian and Mexican goods and used a speech to Davos to threaten more widespread tariffs on goods not manufactured in the US. A survey by HSBC Holdings Plc. showed that 58% of fund managers helping oversee $343 billion in developing-nation assets were bearish EM currencies in December, up from 10% in September. And the latest data from the Commodity Futures Trading Commission shows hedge funds are betting on declines in currencies including the Mexican peso.

“The threat of a resumption of trade wars will limit too much appreciation for EM currencies,” said Eugenia Victorino, head of Asia strategy at Skandinaviska Enskilda Banken AB in Singapore.