Emerging market assets poised for gains as US dollar weakens, says BofA

Emerging market assets are capturing the attention of investors as potential opportunities for significant returns.

According to a recent analysis by Bank of America (BofA) Securities, these assets are poised to deliver "several percent" in returns in 2025, driven primarily by a weakening US dollar.

This forecast comes amid growing economic uncertainties in the US and shifting dynamics in global currency markets.

As the dollar index has already declined nearly 9% this year, emerging economies stand to benefit from favorable conditions, potentially attracting substantial capital inflows.

Why is the US dollar weakening?

The US dollar’s decline in 2025 has been attributed to several factors. The dollar index, which measures the currency’s strength against a basket of major global currencies, has fallen nearly 9% year-to-date.

This weakening is linked to uncertainties surrounding US policymaking, potential economic headwinds from tariffs, and softening labor market conditions.

Furthermore, recent data suggests that the Federal Reserve’s monetary policy stance, combined with fiscal concerns and a steepening yield curve, has diminished the dollar’s safe-haven status in the eyes of global investors.

Bank of America’s optimistic outlook

Bank of America Securities, through insights shared by strategist David Hauner, has expressed optimism about the trajectory of emerging market assets in 2025.

BofA anticipates that the continued decline of the US dollar will act as a catalyst for returns in these markets.

Specifically, Hauner noted that emerging market assets could deliver returns of "several percent" this year, a projection that aligns with recent market movements.

Emerging market stocks have risen for consecutive sessions in early June 2025, with South Korean assets leading the rally following a presidential election.

Regional bright spots and specific gains

Certain regions and countries within the emerging market sphere are already demonstrating notable strength.

The MSCI Emerging Market index has outperformed S&P 500 by more than 7% in the year.

South Korea, for instance, has seen its assets extend world-beating gains in recent days, fueled by political developments and robust economic indicators.

The average return from local sovereign debt is 5.7% in the year. Brazil was the top earner with a 20% return, powered by carry trades.

In a carry trade, investors seek profit from the interest rate differential between two currencies or assets.

Similarly, Latin American markets have emerged as surprising winners in 2025, with year-to-date returns reflecting renewed investor interest.

These gains are partly attributed to a favorable currency environment and improving trade dynamics resulting from the dollar’s decline.

Beyond equities, emerging market currencies are also benefiting from the shifting global landscape.

As the US yield curve steepens amid fiscal concerns, the correlation between higher US term premiums and a weaker dollar has become more pronounced, providing a tailwind for these currencies.

This trend underscores the interconnectedness of global financial markets and the cascading effects of US economic policies on emerging economies.

Implications for investors and global markets

For investors, the potential gains in emerging market assets present both opportunities and challenges.

On one hand, the weakening US dollar and BofA’s positive forecast suggest a window for portfolio diversification and higher returns.

On the other hand, emerging markets remain susceptible to volatility, whether from geopolitical tensions, sudden policy shifts, or unexpected economic downturns.

Investors are advised to approach these markets with a balanced strategy, leveraging thorough research and risk management tools.