Emerging market currencies staged a notable recovery on Monday, nearly erasing earlier declines as the U.S. dollar lost its momentum. This shift occurred even as geopolitical tensions escalated following the United States' capture of Venezuela's leader, Nicolas Maduro, an event that typically boosts demand for safe-haven assets like the greenback.
Dollar Stumbles Despite Geopolitical Shock
The U.S. dollar index slipped 0.1 per cent, surrendering gains made after the dramatic ouster of Maduro over the weekend. The reversal was driven by a disappointing economic report showing U.S. manufacturing activity contracted last month by the most since 2024. This data outweighed the initial risk-off sentiment triggered by the Venezuela operation.
Juan Perez, senior director of trading at Monex USA, noted the changing dynamics. "EM currencies are back on the gaining trend established last year," he said. "This U.S. operation in Venezuela may not translate into strong advancement for the dollar. The buck is losing appeal as a safe-haven."
Selective Gains and Market Reverberations
The MSCI benchmark for emerging market currencies ended the session little changed, masking significant moves beneath the surface. Currencies from Colombia, Mexico, and Brazil all climbed, successfully shrugging off morning weakness.
The impacts of the U.S. action are rippling through specific markets. Dollar bonds in Colombia were among the worst performers in emerging markets as tensions flared between U.S. President Donald Trump and Colombian President Gustavo Petro. The Colombian peso dropped as much as 1.9 per cent before paring losses.
Conversely, Venezuela's defaulted bonds rallied sharply on Monday. Notes from the government and its state oil company, PDVSA, jumped to around 40 cents on the dollar, delivering profits to hedge funds and other investors who had bought the deeply distressed debt.
New Issuance and Cautious Optimism
Capitalizing on the improved sentiment, developing-nation governments and companies rushed to global markets. Mexico is offering notes due in 2034, 2038, and 2056, while Chile is selling debt in both dollars and euros. Saudi Arabia has also joined the issuance rush to fund its ambitious economic diversification projects.
Equity markets mirrored the strength. The MSCI Emerging Markets Index rose 1.6 per cent on Monday, poised for a record close. Taiwan Semiconductor Manufacturing Co. accounted for nearly half the gauge's gains after Goldman Sachs raised its price target. Other major movers included Samsung Electronics, SK Hynix, and Alibaba Group Holding Ltd., buoyed by optimism over AI prospects and expectations for additional Chinese stimulus.
However, analysts urge caution. Charu Chanana, chief investment strategist at Saxo Markets, provided a tempered outlook: "Near term, emerging markets can stay supported, but it’s likely a selective, bumpier grind rather than a straight-line rally. The upside is that Asia tech and AI supply-chain momentum can keep pulling the index higher, especially if global risk appetite stays firm."
Traders are now looking for new catalysts, with upcoming U.S. economic data and corporate earnings in focus. Concerns over the Federal Reserve's interest-rate path, renewed geopolitical tensions, and various upcoming elections across Latin America are keeping a lid on unbridled optimism.
