The Bank for International Settlements published BIS Bulletin No 114 analysing how the US dollar’s 2025 depreciation has influenced emerging market economies (EMEs) through the “financial channel of the exchange rate”, generally loosening financial conditions by strengthening borrower and foreign-investor balance sheets, while also highlighting a countervailing channel that can tighten conditions in EMEs with large outward dollar portfolios. After a multi-decade high in January 2025, the US dollar depreciated by around 5% against a basket of emerging market currencies through September before stabilising. The Bulletin argues that a weaker dollar improves the creditworthiness of EME borrowers with unhedged dollar liabilities, reducing banks’ credit tail risk and supporting an expansion of dollar credit supply, with knock-on effects for working-capital financing and goods trade, particularly in global value chain-intensive manufactured goods. Portfolio inflows to EMEs picked up in 2025 and sovereign spreads tended to tighten as EME currencies appreciated, although inflows were only modestly above 2024 levels and foreign holdings of EME local-currency bonds remain below 2010s peaks. The analysis also points to a less familiar headwind: domestic EME investors that hold sizeable US-dollar assets can incur valuation losses when the dollar falls, prompting higher FX hedge ratios that may amplify currency moves, as illustrated by April–May 2025 dynamics and the underperformance of life insurers in Chinese Taipei with large unhedged dollar exposures. As private sector outward portfolios grow rapidly and some EMEs move toward net international creditor positions, the Bulletin concludes that the traditional financial tailwind from dollar depreciation could increasingly reverse for those economies.
Bank for International Settlements 2025-10-01
Bank for International Settlements explains how a weaker US dollar can ease emerging market financial conditions but strain EME investors with unhedged dollar assets
BIS Bulletin No 114 examines the impact of the US dollar's 2025 depreciation on emerging market economies (EMEs), noting improved borrower creditworthiness and increased dollar credit supply. However, EMEs with significant outward dollar portfolios face valuation losses, potentially tightening conditions. The analysis suggests that as EMEs grow their international creditor positions, the traditional benefits of dollar depreciation may diminish.