EM currencies have weathered ongoing geopolitical risk against the USD – analyst

[Brazilian Real banknotes arranged on a white background.]
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Emerging market currencies have shown surprising resilience against the U.S. dollar despite the ongoing Iran conflict and Brent crude prices (CO1:COM [https://seekingalpha.com/symbol/CO1:COM]) reaching $100 per barrel, according to Luis Costa, global head of emerging market strategy at Citi.

The strategist noted that the greenback’s lack of extreme strength is providing crucial breathing room for EM currencies to continue delivering carry returns, a development he described as unexpected given current geopolitical conditions.

“The amazing news here for us in emerging markets is that the dollar (DXY [https://seekingalpha.com/symbol/DXY]) is not necessarily ultra bullish,” Costa said in an interview with CNBC.

He acknowledged that if he had been told two months ago about the prolonged Iran conflict and elevated oil prices (CO1:COM [https://seekingalpha.com/symbol/CO1:COM]), (CL1:COM [https://seekingalpha.com/symbol/CL1:COM]), he would have predicted a much stronger dollar (DXY [https://seekingalpha.com/symbol/DXY]). Instead, the currency has behaved moderately, creating selective opportunities in emerging markets.

Costa highlighted several EM currencies he currently favors, including the Mexican peso (MXN:USD [https://seekingalpha.com/symbol/MXN:USD]) and the Brazilian real (BRL:USD [https://seekingalpha.com/symbol/BRL:USD]).

He also pointed to the Hungarian forint (HUF:USD [https://seekingalpha.com/symbol/HUF:USD]) as an attractive opportunity, citing the anticipated repricing of credit risk as Hungary moves toward receiving EU transfer funds before year’s end. However, he emphasized that these remain “very selective opportunities” given ongoing dollar uncertainty.

Latin America has emerged as a particularly favorable region for EM investment, Costa explained, because many of these jurisdictions are net exporters of oil.

Countries like Brazil and Mexico are better insulated from higher energy prices, while Argentina’s story remains “very constructive” even from its lower starting position. This dynamic has triggered a noticeable shift of global emerging market risk toward the region.

The ongoing AI cycle also has more footing than European nations when isolating the impact of higher energy inputs. Europe faces more detrimental effects from elevated energy prices, he said, reinforcing the case for selective EM exposure in currencies and fixed income that can still deliver value during this volatile period.

Emerging market currency ETFs: (CEW [https://seekingalpha.com/symbol/CEW]), (LEMB [https://seekingalpha.com/symbol/LEMB]), (EMLC [https://seekingalpha.com/symbol/EMLC]), (EBND [https://seekingalpha.com/symbol/EBND]), (FEMB [https://seekingalpha.com/symbol/FEMB])

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