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Mexican Peso Drops as Trump Imposes Tariffs, Leading to Emerging Markets Sell-off

On Monday, currencies in emerging markets declined against the dollar, with the Mexican peso leading this downturn, following the announcement of tariffs by US President Donald Trump on several significant trade partners.

MSCI’s EM currency index experienced a drop of up to 0.7%, marking its sharpest decline since Trump was re-elected, as Bloomberg’s dollar index reached its highest point since November 2022. There was also a notable decline in an EM equity index, which fell more than 2% at one point.

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The Mexican peso was particularly affected, hitting its lowest level against the dollar in nearly three years following Trump’s decision to impose a 25% tariff on both Mexico and Canada. In response, Mexican President Claudia Sheinbaum vowed to retaliate. The South African rand also saw a decrease of as much as 2% after Trump’s announcement to halt aid to South Africa related to its land expropriation policies.

As the trade conflict escalates, investors are increasingly favoring the dollar, believing that the tariffs will drive inflation rates up and restrict the Federal Reserve’s ability to lower interest rates. Traders anticipate that the tariffs will likely impact foreign economies more adversely than the US, given that American demand for pricier imports is expected to decline.

Rajeev De Mello, a global macro portfolio manager at Gama Asset Management SA, indicated, “I foresee more difficulties for emerging markets,” anticipating that the effects of the tariffs will be worsened by issues originating from China.

He further stated, “A stronger US dollar tightens financial conditions, and a negative supply shock will undermine the global growth that emerging markets rely on.”

Many economists predict that Mexico will continue to shoulder the impact, with Goldman Sachs Group Inc. projecting the peso could fall to 22 per dollar, a decline of approximately 5% from current rates. JPMorgan Chase & Co forecasts an immediate depreciation of 2% to 4%, along with a 20-basis point rise in local bond yields.

South African financial instruments were also affected, as the Johannesburg stock index fell by over 1%, and sovereign dollar bonds dropped in price by more than one cent. Yields on 10-year rand-denominated debt increased by roughly 20 basis points from Friday’s close.

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With Europe potentially in Trump’s sights as well, the Hungarian forint, Polish zloty, and Czech koruna weakened against both the dollar and the euro.

In Asia, the South Korean won and Taiwanese dollar experienced their sharpest declines since 2015 as trading resumed post-Lunar New Year, negatively impacted by their strong trade relations with China. While local markets in China remain closed, the offshore yuan dropped by 0.4%. Additionally, the Indian rupee reached a record low, declining by as much as 0.8%, as traders anticipated a potential rate cut from the central bank on Friday.

According to BNY strategist Wee Khoon Chong, further market declines and capital outflows are likely across Asia. He notes that while domestic fundamentals and policy directions matter, “the immediate focus will remain on the possible consequences of US tariffs on Mexico, Canada, and China.”

© 2025 Bloomberg

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