London: Emerging market (EM) currencies have surged into the global spotlight in 2025, with heightened trading activity and notable gains, as investors reassess their exposure amid a weaker and volatile U.S. dollar. Analysts and hedge funds are increasingly drawn to currencies beyond the traditional G10, seeking higher returns and diversification from dollar-dominated assets.
The Hungarian forint emerged as a star performer, strengthening approximately 20% against the U.S. dollar and marking its best year in nearly 25 years. This rally reflects the broader momentum of emerging market currencies, with MSCI’s Emerging Market Currency Index recording record highs in July and poised for its strongest annual performance since 2017, up more than 6%. Investors are viewing these gains as a possible end to a 14-year “bear market” for EM currencies, according to Jonny Goulden, head of EM Fixed Income Strategy Research at JPMorgan.
The surge has been fueled by a combination of global factors, including U.S.-driven volatility, geopolitical upheavals, divergent central bank policies, and shifting trade dynamics. Portfolio managers like Elina Theodorakopoulou of Manulife noted that this year’s price swings were often triggered by events in developed markets rather than emerging markets themselves. Hedge funds and traders have capitalized on carry trades borrowing in low-yield currencies to invest in higher-yielding EM assets leading to substantial profits. For example, EDL Capital reported a 28% gain this year.
While the inflow of capital and rising currency values benefit investors and governments, they also introduce economic challenges. Appreciating EM currencies can reduce export competitiveness while improving debt repayment capabilities. The International Monetary Fund has warned that nearly half of global FX turnover is concentrated among a few large banks, creating potential vulnerabilities if these institutions scale back during periods of market stress.
Despite the risks, most strategists expect the trend of strong EM currency performance to continue into 2026, particularly if the U.S. dollar remains under pressure. As investors seek diversification and yield, emerging markets are no longer on the sidelines they are becoming central players in global currency dynamics, redefining strategies in the nearly $10 trillion-a-day foreign exchange market.
The year 2025 thus marks a transformative period for EM currencies, blending opportunity, risk, and global financial recalibration as the world navigates the uncertainties of a shifting dollar cycle.