US dollar may remain soft in 2025, boosting emerging market assets: JP Morgan

NEW DELHI: US dollar is expected to stay weak through 2025, potentially benefiting emerging market (EM) assets, according to a research report by 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," the report noted. The report questions whether the prolonged pattern of USD strength and EM weakness spanning 15 years might end. Emerging Market (EM) assets refer to investments in developing countries. These can offer high returns but also come with higher risks. Historically, EM assets tend to move in the opposite direction of the US dollar.The report also notes that the US dollar's recent stability since mid-April is unlikely to continue. The dollar is expected to weaken in the coming months, primarily due to improving growth patterns outside the US.JP Morgan anticipates EM currencies to find stability against the dollar. The report suggests that decreased recession risks could result in EM currencies performing better than 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" the report added.

The easing of trade-related conflicts seems essential for emerging markets to achieve favourable outcomes. US and China reached an agreement to withdraw their previously announced mutual tariffs for an initial 90-day period.Both nations have reduced their respective tariffs by 115 per cent for the 90-day duration.The report identifies a short-term risk related to possible increases in US bond yields, potentially driven by more substantial tax reductions amid high deficits.

Increased US bond yields can negatively affect 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" the report continued.A recent report by Jefferies also predicted that Asian currencies are likely to strengthen against the US dollar in the long run. It noted that emerging Asian countries have much higher gross national savings than developed G7 nations, giving their economies a strong base for currency stability.