The Brazilian Real and Chilean Peso fueled a rally in emerging market currencies during the final days of 2025, as both currencies recorded significant gains in a session marked by light trading. On Tuesday, both currencies surged by more than 1.7% against the US dollar, pushing the emerging market currency index higher for the day. Similarly, the emerging market equity index ended the session with a modest gain of 0.1%.
According to Marco Oviedo, Chief Strategist for Latin America at XP Investments, “The market is very calm considering it is the end of the year. There isn’t much activity in terms of flows.” Despite the quiet trading environment, emerging markets are closing out a remarkable year. Local and hard currency bond indices are poised to deliver double-digit gains, driven by lower interest rates in developed markets and increased diversification by investors seeking alternatives to the U.S. amid political turbulence. The equity index for emerging markets is expected to rise by more than 30% in 2025, while 17 of the 23 emerging market currencies tracked by Bloomberg have appreciated against the dollar.
Adding to the optimism, the Federal Reserve’s final meeting minutes for 2025, released on Tuesday, indicated that most officials anticipate further rate cuts as inflation continues to decline. However, opinions remain divided over the timing and scale of these reductions.
Latin America’s Currency Performance
Tuesday’s rally capped a stellar year for the Brazilian Real, which posted its best annual performance since 2016 with a 13% gain against the dollar. Markets in Brazil, Colombia, and Argentina were closed on Wednesday in observance of year-end holidays. The Brazilian Real benefited from data showing that unemployment had reached a record low, highlighting the economy’s resilience despite high interest rates of 15%. Traders expect the central bank to maintain elevated borrowing costs for an extended period. The Real has also been a standout performer in carry trade strategies, where investors borrow in low-yielding currencies to invest in higher-yielding ones.
On the other hand, Colombia’s markets faced turbulence following the government’s decision to raise the minimum wage. This announcement caused interest rate swaps to spike, as investors worried about accelerating inflation, higher borrowing costs, and a widening fiscal deficit. Colombian dollar bonds were among the weakest performers in emerging markets. Alejandro Arreaza, an economist at Barclays, wrote in a Tuesday note, “This significant wage hike creates headwinds for reducing inflation. The central bank may need to act sooner, potentially with a 50-basis-point rate hike in January.”
Broader Trends in Emerging Markets
While Latin American currencies displayed strong movements, emerging market currencies and equities overall showed no clear direction amid a lack of significant catalysts during the final trading sessions of the year. In Asia, the Chinese Yuan extended its gains, with its exchange rate dropping below 7 yuan per dollar for the first time since 2023. This reflects policymakers’ comfort with allowing the currency to strengthen further. South Korea’s stock market also ended the year on a high note, with the KOSPI index recording its largest annual gain in 25 years, surging by approximately 76%—significantly outpacing the performance of U.S. and regional equity indices.
As 2025 draws to a close, emerging markets have demonstrated resilience and growth, bolstered by favorable global monetary conditions and strategic diversification by investors. However, challenges such as wage policies, inflation, and fiscal deficits remain key issues for several economies in the region heading into the new year.
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