- Increased interest in EM FX a key takeaway from whipsawed 2025
- Dollar weakness expected to continue in 2026, bolstering EMs
- Hedge funds, bank FX desks benefited the most
LONDON, Dec 15 (Reuters) - Trading in the Hungarian forint, long a niche emerging market currency, has more than doubled since U.S. President Donald Trump took office in January, with trader interest only growing since his sweeping "Liberation Day" import tariffs announcement.
These increased volumes are no blip either, say traders, strategists and hedge funds navigating the almost $10-trillion-a-day global FX markets.
The forint has strengthened roughly 20% against the dollar this year, set for its best year in almost a quarter of a century and making it one of 2025's top emerging currency performers .
It has been a good year more widely: MSCI's Emerging Market Currency Index hit a record in July and is on course for its best year since 2017, having gained more than 6%.
Traders, fund managers and analysts spoken to by Reuters mostly expect this trend to continue next year, too.
The gains come as a more volatile and weakening dollar prompts investors to rethink exposure to the currency and question long-held assumptions about the direction and standing of the greenback.
Meanwhile, they are betting on improving value across some developing countries from South Africa to Hungary as they diversify away from U.S. assets.
"We think that the cycle of what we would call a bear market for EM currencies, which has lasted for 14 years now, has likely turned," said Jonny Goulden, head of EM Fixed Income Strategy Research at JPMorgan. "That is part of this turn in the dollar cycle, where the world owns a lot of U.S. assets and has avoided EM assets."
TRADING RISKS DRAW IMF WARNING
For Elina Theodorakopoulou, portfolio manager for emerging markets debt at Manulife, the surprise this year was that price swings were triggered by events in developed economies.
"It was the cool kid in the class this year, emerging markets, in the sense that it wasn't the driver of volatility," said Theodorakopoulou.
The U.S.-driven splintering of world trade, geopolitical upheaval and divergent central bank policy is expected to continue to drive price moves.
Investors, including hedge funds, are making and losing money, while for governments, appreciating currencies and capital inflows have major economic implications, from reducing the appeal of exports to bolstering their ability to raise and repay debt.
The risks have not gone unnoticed. The International Monetary Fund in its latest financial stability report warned about dangers from currency markets.
Nearly half of global FX turnover is intermediated by just a small group of mostly large banks, leaving the market exposed should they scale back activity during periods of stress, the IMF said.
Currency volumes are up almost 30% in the past three years, the latest data by the Bank for International Settlements from April shows.
And 2025 has been a rollercoaster ride, with developed market currency volatility spiking to two-year highs in April before easing. A steadier market has made it a more attractive environment for carry trades -- borrowing in low-yielding currencies to invest in higher-yielding ones.
Hedge fund EDL Capital, which manages $1 billion, is up 28% this year, on gains at the start of the year and around so-called Liberation Day, helped by bets against the dollar, said a source with knowledge of the matter.
As a money-spinner for banks, trading EM currencies was a boon, data compiled for Reuters by Vali Analytics shows.
EM currency trading generated almost $40 billion in revenue for the top 25 global banks in the first nine months, their best year so far. That's more than twice the $19 billion the banks earned from Group of 10 currencies, the data firm's analysis shows. The G10 comprises major currencies from the dollar to sterling to the euro.
Finding opportunities to make money in currency trading, especially among the G10, has been challenging, said Samer Oweida, global head of foreign exchange and emerging markets trading at Morgan Stanley.
"If investors stayed within FX, they rotated into higher-yielding structural stories across emerging markets."
Just over half of 14 top currency traders, hedge fund managers and analysts Reuters spoke to see greater interest in EM currencies as a key trend likely to continue in 2026.
Increased hedging and volatility in an era where dollar strength is no longer a given are also likely to persist, they said.
A NEW LIGHT
The soft dollar tide has not floated all boats, however. Anaemic trade and investment flows pushed India’s rupee to record lows, while worries about central bank independence and political unrest have hurt Indonesia's rupiah IDR=.
But while the dollar has recovered from a beating -- it suffered its biggest first-half dive since the early 1970s with losses of almost 11% -- analysts expect U.S. rate cuts will bring further weakness.
Traders are pricing two more quarter-point rate cuts by the Federal Reserve next year, LSEG data show.
For many EM currencies that backdrop is key and has fuelled inflows. For some, ramped-up carry trades have added to momentum.
Mexico's peso and Brazil's real are also among the best-performing emerging currencies this year.
They feature prudent central banks and high interest rates, in Brazil's case rates are at a two-decade high of 15%, as well as easily accessible currency and bond markets.
"There have been strong inflows into broad EM, across both local and external (bond markets), and I would not bet on that trend reversing anytime soon,” said Nikolas Skouloudis, portfolio manager at Amia Capital, which manages roughly $1.4 billion.
The hedge fund returned 16% in the year so far, said a separate source familiar with the fund's performance.
Reporting by Nell Mackenzie, Dhara Ranasinghe and Alun John in London, additional reporting by Laura Matthews in New York; Editing by Elisa Martinuzzi, Karin Strohecker and Hugh Lawson
Source: Reuters