Emerging Market Currencies: Mixed Strengths from July to September

■ Due to a pause in the dollar's depreciation, emerging market currencies saw significantly narrower gains and losses against the dollar from July to September compared to the first half of the year.  

■ East Asian currencies weakened, while currencies in other regions strengthened due to higher real policy rates and political factors. 
 
This report briefly summarizes emerging market currency market trends from July to September. Analysis covers 12 regions (data as of the end of September): Asia (China, South Korea, Taiwan, Thailand, Indonesia, and Malaysia), Central and South America (Brazil and Mexico), Eastern Europe (Hungary and the Czech Republic), and other major economies (South Africa and Turkey). The performance of these currencies against the dollar from July to September varied, ranging from +2% to -4%. Eight currencies rose, while four fell. Compared to the periods of January to March, when the dollar weakened significantly (10 currencies rose), and April to June (11 currencies rose), the direction of the July-September period is more difficult to determine. 
 
East Asian currencies generally weakened during this period. For example, South Korea (-3.7%) and Taiwan (-2.9%) both rose by over 8% between April and June, but suffered the largest declines among the 12 emerging market currencies from July to September. Despite continued global inflows into the semiconductor sector, which is related to artificial intelligence (AI), and semiconductors being a key industry for both South Korea and Taiwan, the weakness of the currencies remains unexpected. One factor contributing to this trend may be the ongoing US-South Korea and US-Taiwan trade negotiations. While South Korea lowered tariffs on US exports to 15% in August, the documenting of a $350 billion (approximately 51.4 trillion yen) investment agreement with the US in exchange for it has reached a stalemate. President Yoon even stated that if the US demanded an early payment, South Korea could face a currency crisis, creating a precarious situation. Meanwhile, Taiwan has reportedly refused to agree to produce half of its semiconductor output in the United States, and as a result, the 20% tariff on US exports is expected to remain in place for the foreseeable future. However, as of this writing, the Korean won and the New Taiwan dollar (NTD) remain above their 200-day moving averages against the US dollar (KRW 1,413.41 and TWD 31.237, respectively), preventing significant concerns about currency devaluation. 

   The top three currencies experiencing the largest appreciation are the South African rand (+2.5%), the Mexican peso (+2.3%), and the Brazilian real (+2.0%). This relatively modest increase compared to the January-March period (BRL: +8.7%) and the April-June period (NTD: +10.9%) is primarily due to the overall volatility of the US dollar, which rose in July and fell in August. Against this backdrop, the three currencies that performed strongly from July to September were not affected by political uncertainty, unlike the Turkish lira (-4.5%) and the Indonesian rupiah (-2.6%), which may be one of the main reasons for their continued strength. Coupled with the support of high levels of real policy interest rates, it is expected that the attention on these three currencies will remain at a high level during the period from October to December.