Emerging market currencies surged to their highest level in nearly two months on Wednesday, December 24, 2025, as a combination of a weaker U.S. dollar and supportive domestic policy actions lifted investor sentiment. The moves were amplified by significantly reduced trading volumes due to the Christmas holiday season.
Fed Outlook and Thin Liquidity Fuel Rally
The broad rally was primarily driven by growing expectations that the U.S. Federal Reserve will soon begin cutting interest rates. This prospect typically weakens the dollar and makes higher-yielding assets from emerging economies more attractive to global investors. The MSCI index for emerging market currencies advanced by 0.4%, a level not witnessed since late October.
Economists at ING noted that these currencies are ending the year strongly, benefiting from lower core policy rates, a modestly softer dollar, and attractive high carry returns. With most global markets closed on Thursday and Friday for Christmas, trading activity was expected to remain subdued until the end of the year, potentially leading to sharper price swings.
Domestic Policies Shape Individual Market Performance
While the Fed's stance provided a broad tailwind, performance varied across regions due to local developments. In South Korea, the won strengthened to its highest point since mid-November. This gain followed a Reuters report indicating that the country's national pension fund was initiating steps to support the currency. However, the local KOSPI stock benchmark dipped slightly by 0.2%.
In Israel, the shekel gained 0.1% against the dollar, but financial stocks faced pressure. This came after Finance Minister Bezalel Smotrich announced plans to introduce a law taxing commercial banks 15% on what he termed "excess" profits, accusing them of exploiting customers during recent years of high interest rates.
The Turkish lira held steady after a five-session winning streak. The government's decision to raise the monthly minimum wage by 27% for 2026 was a key focus, with economists warning the move could fuel inflation in the coming months.
Equities Join the Advance, China and Vietnam Shine
Mirroring the currency gains, the MSCI index for emerging market equities also rose 0.4%, positioning itself for its longest winning streak in over a month. Investors found additional encouragement in domestic factors, such as milder-than-anticipated inflation data released on Tuesday from major economies like Brazil and Mexico.
International Monetary Fund economists highlighted in a column that while emerging markets remain sensitive to global risk sentiment, they are gradually moving closer to genuine monetary policy independence.
In Asia, Chinese equities posted gains, with the Shanghai Composite index up 0.5% and the blue-chip CSI300 index rising 0.3%. This occurred despite news that the U.S. administration under President Donald Trump planned to impose tariffs on Chinese semiconductor imports, though the action was delayed until June 2027.
Vietnamese stocks rallied to a record opening high, buoyed by investor confidence following signs of political stability. A senior Communist Party meeting successfully agreed on candidates for the country's next five-year leadership cycle. The overall positive sentiment across emerging assets underscores a resilient finish to the year for these markets.
