JP Morgan report predicts soft USD benefiting EM assets, with potential for EM currencies to outperform dollar.
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The US dollar will remain soft this year, which is likely to benefit Emerging Market (EM) assets, according to a research report by American investment banking firm JP Morgan. “USD could stay soft this year, which would help EM assets. EM historically traded inversely to the dollar, and the big question is whether the last 15 years’ downtrend in EM and the strong USD could be ending,” says the report.
EM assets involve putting money into countries with developing economies. While these investments have the potential for significant returns, they also carry elevated risks. Historically, EM assets have often traded inversely to the US dollar’s performance. The report raises the question of whether the 15-year-old trend of stronger USD and weaker EM assets could come to an end.
According to the report, USD’s stable run since mid-April is unlikely to last long, which basically means, weakening of the USD against major currencies in the coming quarters, mainly driven by improving growth trends outside the US. Additionally, EM currencies are expected to stabilise against the dollar, JP Morgan said. Adding that a reduction in recession risks could even lead to EM currencies outperforming the dollar. “Within EM, we think China could be of interest, with CSI potentially catching up with H-shares, as well as India and Brazil,” adds the report.
Furthermore, the de-escalation in trade uncertainty can also be seen as one of the key catalyst required for positive trajectory of EM’s. On the geopolitical side, US and China arrived at an agreement that they will withdraw their previously announced reciprocal tariffs and counter tariffs for an initial period of 90 days. The tariffs for 90 days are reduced by 115 per cent, by both the US and China against each other. The report also acknowledges a near-term risk that is the potential for rising US bond yields. This could be driven by prospects of more aggressive tax cuts amidst elevated deficits. Higher US bond yields can sometimes put pressure on EM assets.
“We recognise that in the near term the chances are that US bond yields move up, potentially driven by prospects of more aggressive tax cuts being attempted in the backdrop of elevated deficits, and by the likely US inflation prints pickup on tariffs follow through” says the report. Recently, a report by Jefferies also forecasted that Asian currencies are likely to appreciate against the US dollar in the long term. It also highlighted that the gross national savings in emerging Asian countries are significantly higher than those in developed G7 nations, giving Asian economies a strong foundation for currency strength.
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Published on May 26, 2025
