(Bloomberg) — Emerging markets were hit hard by the resurgence of the “Trump trade” Wednesday as the dollar and US yields soared following Donald Trump’s victory in the US presidential race.
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Currencies in Eastern Europe led losses, sending the emerging-market currency gauge to its worst day since February 2023. The Mexican peso, often seen as the most vulnerable to Trump’s trade policies, edged higher in a volatile session. Earlier in the day, the currency slumped as much as 3.5%.
Traders are still uncertain over how a second Trump presidency will affect developing economies. His pledges of stronger restrictions on imports and immigration are fueling bets on higher US borrowing costs and a stronger greenback, dragging down other currencies.
“Trade tariffs and other Trump administration policies may be inflationary for the US,” according to Tom Wilson, head of emerging-market equities at Schroder Investment Management Ltd. “The expected outcome would be dollar strength, higher inflation, less easing from the Fed and a higher US yield curve. All of this is broadly unhelpful for EM equity returns, pressuring currencies and limiting freedom of action for central banks.”
The MSCI Emerging Market equity index fell 0.6%, dragged lower by Asian stocks as traders priced in punitive tariffs for the world’s second-biggest economy.
It was Trump’s trade war against China during his first term that halted an EM equity rally and sparked an underperformance versus the US that continues to this day. China’s stock indexes in Hong Kong slid more than 2.5%.
Traders had been preparing for a Trump victory in recent weeks, with currency volatility soaring in the lead-up to the vote, likely easing the blow as the session wore on today.
The Republican’s proposals to impose tariffs would hit Mexico — the largest trade partner with the US — particularly hard. On the campaign trail, Trump said automakers building plants in Mexico are a “serious threat” to the US.
“There had been a de-risking of certain Latam currencies in the days and weeks prior to the election so this may help explain the move,” said Bret Rosen, economist and strategist for Latin America at EMSO Asset Management.
The Mexican peso edged higher at the end of trading in New York, while the Brazilian real erased earlier losses to lead gains among developing nation currencies. Despite the peso rallying up in some instances throughout the afternoon, a Trump presidency still poses risks to the currency ahead, according to Alejandro Cuadrado, strategist at BBVA.
