A softening dollar is breathing new life into Latin America’s asset markets, drawing investors hungry for yield – despite warnings the greenback’s current weakness may prove short-lived.
A softening dollar is breathing new life into Latin America’s asset markets, drawing investors hungry for yield – despite warnings the greenback’s current weakness may prove short-lived.
A lot has happened since Donald Trump returned to the White House at the start of this year. He has, among other measures, raised import tariffs, tightened controls on media and speech, and sought greater authority to influence economic data and monetary policy in favor of lower interest rates. But while he has promised to deliver a US economic boom, growth has, so far, slowed somewhat.
This policy volatility, particularly the uncertainty around tariffs, has been unnerving for Latin American borrowers, with some analysts opining that Trump’s erratic management style is reminiscent of that of an emerging-market leader. But paradoxically, emerging markets are benefiting from all this, with a weakening greenback prompting investors to look beyond US shores.
“We are in the early stages of a weak-dollar cycle,” says Armando Armenta, senior economist for global economic research at AllianceBernstein, a Nashville-based investment firm.
The dollar has fallen roughly 9% this year through October 10 against a basket of currencies. Armenta says this softening may not necessarily trigger capital outflows from US equities, but portfolio managers will be scanning emerging markets for higher yields to hedge dollar exposure.
Big gains
Latin American equity markets have already recorded double-digit gains this year through October 9, with Mexico’s flagship index rising about 22% and Brazil’s around 17%. The S&P Latin America 40 index of blue-chip stocks has climbed roughly 37%. Bond indices have seen healthy increases as well, with an S&P 10-year plus inflation-linked bond index for Mexican government debt up strongly, though not all sources confirm a 20% gain.
It helps that the depth of Latin America’s capital markets has improved over the years, as this gives global investors more comfort to allocate their money to the region, says Giulia Pellegrini, deputy chief investment officer for emerging-market fixed income at Allianz Global Investors in London.
Eileen Gavin, head of sovereign research at Verisk Maplecroft, a UK-based global risk and strategic consulting firm, says Latin America’s institutional stability and transparency has made it “a safe haven” for emerging-market investors amid global trade tensions, China–US frictions, and conflicts in Eastern Europe and the Middle East.
Not surprisingly, net portfolio flows into Latin American stocks and bonds grew sharply in 2025, with IIF data showing about $8.9 billion of inflows in August alone, far more than the single-digit growth in other emerging regions.
Cheaper money
The rise in investors’ appetite for Latin American debt is good for borrowers. It has led to multiyear lows in credit spreads, the extra premium that issuers have to pay over benchmark US Treasury yields.
According to the ICE BofA Latin America Emerging Markets Corporate Plus Index, the region’s corporate bond option-adjusted spread hovered near 1.5% in early October, its lowest level in nearly two decades, and a welcome change from the more than 3.5% to 5.3% that issuers paid between 2022 and early 2024.
Getting more affordable
CE BofA Latin America Emerging Markets Corporate Plus Index Option-Adjusted Spread, December 31, 1998 to September 18, 2025
Source: Ice Data Indices via the Federal Reserve Bank of St. Louis
Where US Treasury yields go from here is anyone’s guess, however. A weak US jobs report in August prompted the benchmark 10-year yield to fall to the 4% mark, as investors bet on more Federal Reserve rate cuts. But analysts also caution that US policy uncertainty—the tariffs, higher deficits, a mounting national debt, and pressure on the Fed—could keep yields elevated, especially at the long end of the curve.
Graham Stock, BlueBay senior sovereign emerging markets strategist at RBC Global Asset Management in London, says that Latin America has been navigating the tariff threat relatively calmly, given that globally the hikes have been focused on Asia.
It helps, too, that Latin America is not a direct competitor in manufacturing to the United States compared with Asia, and so it’s not in the crosshairs of the US administration’s efforts to re- or nearshore manufacturing.
The counter-current
Still, a weaker dollar alone won’t guarantee continued inflows. “The key question is whether this is a real cycle shift or just a pause,” says RBC’s Stock. “If US yields push higher again or global risk appetite fades, Latin markets will feel it first.”
Talk of a sustained weak-dollar cycle may be premature: Sticky inflation in the US, resilient growth, and the prospect of political pressure on the Federal Reserve could yet cause the dollar to rebound.
Analysts at Citigroup and JPMorgan, among others, have pointed out that the dollar tends to weaken only when the Fed is cutting rates aggressively or when US growth underperforms. So far, neither condition appears to be in place. The US economy expanded at an annualized rate of just over 2% in the second quarter, unemployment remains near multi-decade lows, and core inflation has proven sticky—factors that support relatively higher US yields.
Moreover, the dollar’s safe-haven role continues to dominate during bouts of volatility, according to Fitch. Periods of geopolitical tension or market stress—whether related to China’s slowdown, Europe’s sluggish growth, or ongoing conflicts in Eastern Europe and the Middle East—have repeatedly drawn investors back to US assets rather than away from them.
Fiscal dynamics could further complicate the picture. The US deficit, currently exceeding 7% of GDP, and the debt-to-GDP ratio—expected to top 130% by 2026—might intuitively appear dollar-negative. Yet large fiscal deficits can sometimes strengthen the currency in the short term, since they support higher growth and keep yields elevated, according to Allianz. The investment manager noted in a recent global strategy outlook that “the dollar can remain firm even in the face of fiscal slippage if US yields stay high relative to the rest of the world.”
While many emerging-market investors are positioning for a weak-dollar cycle, a number of global macro strategists continue to stress that the fundamental drivers of dollar strength—US growth, real-rate differentials, and safe-haven demand—have not yet disappeared.
Steeper at the long-end
Putting aside the tariff tremors, a big worry for Latin American debt strategies are Trump’s threats against the Fed’s independence.
Wilson Ferrarezi, a São Paulo-based economist for GlobalData TS Lombard, warns that if Trump puts a loyalist at the head of the Fed or if he increases his pressures and forces a big decline in interest rates, that could lead to a lower rate in the shorter term but higher in the longer term.
“The problem is that this would probably steepen the yield curve significantly in the longer term as the markets start to price in the need for even tighter monetary policy to correct this political influence in monetary policy,” he says. “For the first time in many decades, we are having this discussion about monetary policy being at risk of political pressure in the US.”
“For the first time in many decades, we are having this discussion about monetary policy being at risk of political pressure in the US”
Wilson Ferrarezi, GlobalData TS Lombard
On October 9, the shortest-term yields on the curve were slightly above 4%, dipping to as low as 3.6% at three years and climbing steeply to above 4.1% for 10 years and surpassing 4.7% for 20 to 30 years—accurate levels based on Treasury data.
Steepening
US daily Treasury par yield curve rates, September 19
Source: US Department of the Treasury
Ferrarezi says this is a big risk for countries heavily reliant on external financing like Argentina, Chile, Ecuador, El Salvador, Mexico and Peru, as it will increase their debt servicing costs and local interest rates, leading to slower economic growth and worse fiscal accounts.
AllianceBernstein’s Armenta says the steepening of the curve has altered issuance strategies. “Instead of terming out, debt management offices have been shortening maturities to capture lower yields in the front end,” he says.
Wooing investors
Marcos Buscaglia, a founding partner at Alberdi Partners, says uncertainty about the future of yields is putting some of the onus on countries to improve their fiscal accounts so that they can issue at lower yields in the middle and long end of the curve.
That will be a challenge. Other than Argentina, which slashed spending to turn a perennial fiscal deficit into a surplus since 2024, albeit at a big political cost, most countries’ fiscal positions have been weak.
Brazil missed its zero-deficit goal through July, while Chile and Colombia raised their deficit targets for the year. Still, there is potential for improvement: Costa Rica, Peru and others are heading into elections that could usher in more market-friendly governments, Buscaglia says. If reforms are implemented and fiscal positions improve, spreads could tighten further.
“Investors are looking for good stories, for alpha, now that the theme of American exceptionalism looks behind us,” Buscaglia says. “The base rate remains high, but through better fiscal positions and through better policies, you can reduce the spread between Latin America’s debt and the US debt.”
Armenta adds that reforms—from lower taxation to spending cuts, debt reduction and deregulation—could trigger sustained inflows into Latin America.
There has been a flurry of sovereign bond issuance in 2025, with issuers raising about $127 billion through mid-September, up 35% year-on-year, according to LSEG. Most of the growth was in the cross-border market, where issuance shot up 39% on the year to $93 billion, much faster than the 5% growth in the domestic markets to $34 billion.
Francisco Campos, chief economist for Latin America at Deutsche Bank in New York, says a combination of higher external financing needs and opportunism drove this increase.
Chile and Peru, for example, allowed people to withdraw money from their pensions during the COVID-19 pandemic, reducing the capacity of domestic capital markets and pushing up reliance on external financing. Mexico, too, went to the international bond market to help pay down the roughly $100 billion debt of Pemex, the world’s most indebted oil company.
The other driver has been opportunism. “Countries knew of all the noise and the volatility in the financial markets, and so when they saw the opportunity to issue, they went bigger than probably if they had seen a more stable backdrop, just because they wanted to front-run the next bout of volatility,” Campos says.
Ditching the dollar?
If uncertainty lingers longer than expected, this question, fueled by Trump’s uneven policymaking, has raised concerns about the reliability of US policies and Treasury bonds as the global risk-free benchmark.
Sergey Dergachev, senior portfolio manager at Union Investment Privatfonds, says the US dollar will remain the key currency for Latin American issuers, though more may choose to diversify with euro- and Swiss franc-denominated bonds—a market that “has been dormant.”
That trend may have started. Uruguay and Panama borrowed in Swiss francs early in the year—Uruguay through a CHF320 million bond and Panama via a bank loan—while Colombia and Mexico went to the market with big euro deals in September with strong demand. Mexico’s América Móvil is considering issuing euro-denominated debt.
“This certainly seems like a trend,” says Todd Martinez, co-head of Americas sovereigns at Fitch Ratings in New York. “We would not be surprised if it continues.”
The strategy allows issuers to diversify their funding mix and access new investors, and the lower interest rates in euros and francs are part of the attractiveness.
The longevity of this trend depends on exchange rates, Martinez says. Panama, a dollarized economy, took out euro loans early in the year only for the euro to appreciate by around 10% against the dollar—a move that reduced rather than increased cost savings.
Carlos de Sousa, at Vontobel Asset Management, says it still makes sense for some borrowers to issue in euros, particularly if they are agnostic about the dollar. “This trend could continue for a while,” he says, but notes that with the Fed starting to cut rates again in September and the ECB largely done, that interest-rate differential will narrow.
Another winner could be local-currency debt, buoyed by the weak dollar. An appreciation of Latin American currencies is fueling inflows into local-currency funds, whereas interest in hard-currency funds has been muted, says RBC’s Stock. “We think there is more value in a number of Latin American names than there is elsewhere,” he says.
A bright spot – with risks
There still are concerns. A slowdown in the Chinese and US economies would have a knock-off effect on global growth and market volatility, warns Andrés Pardo at XP Investments. “That is obviously not great for emerging markets,” he says.
Even so, bond issuance is expected to grow in Latin America, says Joan Domene at Oxford Economics. This partly stems from the need for financing, given that most governments have not implemented structural tax measures even as social spending continues to rise.
The good news for issuers is that while economic uncertainty, elevated inflation and high US yields are keeping borrowing costs high in Latin America, that may not be for too long. If trade tensions lead to slower global growth and lower inflation, rates should follow. “This should help borrowing costs to fall,” Domene says.
Still, as RBC’s Stock cautions, “the dollar’s decline has made everyone more optimistic—but optimism can turn fast.”
For now, Latin America is riding the wave of dollar weakness, but whether it lasts is a question that could define the next decade of the region’s finance. LF
by Charles Newbery, Polo Rocha and Hernán Goicochea
LINK NOTA: https://latinfinance.com/magazine/2025/10/16/latam-markets-taking-flight/
