A surging U.S. dollar, fueled by expectations of a second Donald Trump administration, has triggered the most significant sell-off in emerging market (EM) currencies in two years. According to analysts, the rally reflects a revival of the “TINA” effect—short for “There Is No Alternative”—as global investors flock to the perceived safety of the U.S. dollar amid deteriorating economic conditions worldwide.
The JPMorgan EM currency index has plummeted by over 5 percent in the past two and a half months, marking its worst quarterly decline since September 2022. This broad-based retreat has seen at least 23 currencies tracked by Bloomberg weakening against the greenback. The Mexican peso fell by 2.1 percent, while China’s offshore renminbi dropped 3.7 percent. South Africa’s rand, often a proxy for EM sentiment, slid by 2.4 percent, Reuters reports.
The resurgence of the dollar is being driven by “Trump trades,” including expectations of sweeping trade tariffs and expansive fiscal policies under a potential second Trump term. Paul McNamara, an emerging market strategist at GAM, called the dollar the “front and center” force behind the EM currency rout, reports The Financial Times. Trump’s proposed levies of 25 percent on Mexican and Canadian imports and 10 percent on Chinese goods could further strained developing economies.
Compounding the issue is a “confluence of bad news” hitting emerging markets, according to Thierry Wizman, global FX strategist at Macquarie. “There’s been a confluence of bad news in the emerging markets,” Thierry Wizman told The Financial Times.
Weak economic growth in China, fiscal crises in Brazil, and low productivity in Mexico have eroded investor confidence, he noted. In Brazil, the real hit record lows amid concerns over public debt, while China’s benchmark 10-year bond yields fell below 2 percent, a 22-year low, as traders anticipate further rate cuts.
The sell-off has also undermined popular EM “carry trades,” where investors borrow in lower-yielding currencies like the yen to invest in higher-yielding EM currencies.
According to Investopedia, “Acceptance of TINA can lead to the ‘TINA Effect,’ a phenomenon in which stocks rise only because investors see no viable alternative place to put their money. In particular, during times when bonds are performing poorly, stocks appear to be the only choice.”
