The Dollar Under Pressure: Investors Bet on Emerging Market Currencies Amid Uncertainty

Global investors are displaying a clear lack of confidence in the U.S. economy, anticipating a gloomier outlook for the United States compared to the rest of the world.

This perception is evident in the foreign exchange market, where the U.S. dollar is facing significant weakness against major emerging market currencies.

Bets on a weaker dollar against currencies like the Brazilian real, Mexican peso, or South African rand are undermining expectations of a short-term recovery for the greenback. In this context, carry trade operations against the dollar have reached levels not seen since 2018, driven by both the dollar's weakness and the fragility of the global trade truce.

The carry trade is an investment strategy that seeks to capitalize on interest rate differentials between currencies. Essentially, investors borrow in a currency with low interest rates, such as the dollar, to invest in another with a more restrictive monetary policy, thereby generating returns.

Currently, the dollar is perceived as a weak currency due to economic uncertainty in the United States, prompting investors to favor alternatives like the euro and emerging market currencies.

For instance, the euro has gained 10.2% against the dollar so far in 2025, trading at 1.14 dollars, at the time of writing.

Euro vs. dollar index. Source: TradingView.

Meanwhile, emerging market currencies have risen an average of 5% against the dollar, according to Bloomberg’s index tracking a diversified basket that includes the Turkish lira, Hong Kong dollar, Brazilian real, and Mexican peso, among others.

The perceived risk associated with dollar-denominated assets, such as Wall Street stocks, has led investors to reassess their exposure.

Uncertainty about dollar

However, the consensus of experts surveyed by Bloomberg does not suggest a swift recovery for the dollar. Uncertainty about a potential U.S. recession, combined with tensions from the trade war, has increased volatility in the foreign exchange market and put downward pressure on the dollar.

Bloomberg’s emerging market carry trade index has risen 7% in 2025, with long positions in these currencies against short positions in the dollar reaching seven-year highs.

By region, carry trade operations against the dollar are particularly prominent in emerging economies in Europe, the Middle East, and Africa, led by the Turkish lira, Polish zloty, and South African rand.

Bloomberg’s index tracking these operations has surged 15% so far this year. In Asia, excluding the Hong Kong dollar and Chinese yuan, currencies have gained 7%, while in Latin America, led by the Brazilian real and Mexican peso, the advance is 6%.

The market reflects a shift in investor confidence, with emerging market currencies seen as an opportunity amid a dollar weakened by economic and trade uncertainty.

As long as these conditions persist, carry trade strategies will continue to dominate, cementing emerging market currencies as key players in the global financial landscape.