06:12 AM EDT, 03/25/2025 (MT Newswires) -- Emerging market (EM) currencies have weakened "modestly" against the US dollar over the past week having lost upward momentum, said MUFG.

The worst-performing EM currencies have been Turkey's TRY (-3.4% versus the USD), Russia's RUB (-3.2% versus the USD), Hungary's HUF (-1.9%) and Brazil's BRL (-1.6%), wrote the bank in a note to clients. In contrast, India's INR has clearly outperformed (+0.9% versus the USD) strengthening alongside Malaysia's MYR (+0.2% against the USD).

The bullish trend for EM foreign exchange against the USD has displayed signs of exhaustion after sharp gains since the start of this month, stated MUFG. It has been notable that the USD has rebounded over the past week even after the dovish Federal Reserve's policy update pulled down United States yields.

Federal Reserve Chair Jerome Powell indicated that the Fed is willing to look through higher inflation this year from tariffs based on the belief that it's likely to prove transitory. FOMC participants' forecasts for inflation in 2026 and 2027 were left unchanged.

As a result, the Fed is sticking to plans to cut rates further later this year by 50bps in response to expectations for the labor market to loosen as the unemployment rate rises up to 4.4% by year-end.

Another unfavorable development for the USD has been reports that President Donald Trump's plans for tariffs on April 2 won't be as disruptive as feared, pointed out the bank. A more targeted approach for reciprocal tariffs and not following through at least initially on plans for sector-specific tariffs would help ease downside risks for global growth and EM currencies.

The TRY has been the worst-performing currency over the past week triggered by the latest domestic political developments in Turkey, added MUFG. USD/TRY initially jumped above the 41.000 level but has since dropped back below the 38.000 level. It marks a step up in the pace of TRY depreciation which had been declining by an annualized rate of around 15% against the USD.

The main trigger for the faster TRY sell-off has been the detention and formal arrest of Istanbul Mayor Ekrem Imamoglu who was jailed on corruption charges on Sunday, noted the bank. The case has the potential to keep Imamoglu behind bars for years and prevent him from running against President Tayyip Erdogan in the next election. His arrest came on the same day that he was scheduled to be declared the presidential candidate for the main opposition Republican People's Party, CHP.

Turkey's market regulator has since announced steps on Sunday including a ban on short-selling, more relaxed conditions for share buybacks and a reduction of the minimum equity capital protection requirement for margin trading. The Central Bank of Turkey (CBT) also raised the overnight lending rate by two percentage points to 46.00% to tighten monetary policy and provide more support for the TRY.

According to reports, Turkey's top economic officials will speak with international investors on Tuesday in the latest attempt by the government to calm financial markets. Finance Minister Mehmet Simsek and CBT Governor Fatih Karahan are both scheduled to speak at 1 p.m. London time according to the Treasury website. President Erdogan emphasized on Monday that he will maintain more investor-friendly policies that have been put in place since Simsek became finance minister in 2023.