ENG: Interest rate differentials trading or igniting the summer market volatility in emerging market currencies

The Dutch international group (ING) said that emerging market currencies are benefiting from a weak US dollar, and if the US cuts interest rates, it may attract more funds for carry trades, further boosting emerging market currencies. Chris Turner, the head of foreign exchange strategy at the Dutch international group in London, and his colleagues stated in a report on Tuesday that investors are speculating on whether the US and Asia trade agreement will involve exchange rate issues, while Latin American economies seem to have avoided the worst impact of President Donald Trump's tariffs. The Dutch international group said that markets with relatively high implied yield rates, such as Brazil and Mexico, are proving attractive, as well as the "high risk, high return" Turkish lira and South African rand. The Dutch international group also added that despite some countries (especially Romania) facing domestic political challenges, Eastern European currencies are reflecting the strength of the euro against the US dollar. Most emerging market currencies are expected to rise against the US dollar by 2025 Turner said: "If the Fed really starts cutting interest rates, more importantly, if volatility stabilizes further, we will start hearing more about dollar funding carry trades." "This may be the story of this summer." Carry trades involve borrowing currency from countries with relatively low interest rates and investing these funds in markets with higher interest rates, usually in developing economies. This strategy favored by emerging market investors offers attractive returns, but during periods of high volatility, these trades may be quickly unwound.