Takeaways from the Spring 2025 IMF Meetings

My team and I just attended spring 2025 IMF meetings and here are our main takeaways.

Dollar weakness likely as U.S. inflation rises and EM inflation improves.

Number one, depreciation of the dollar. The biggest light bulb went on when the IMF upgraded or worsened the inflation forecast for the U.S., but deteriorating inflation outlook in China. So you have higher than expected inflation in the U.S., lower than expected in China and EM. The major light bulb went on that that means dollar weakness against the declining or lower inflation countries. So that was one big light bulb that went on, dollar depreciation.

Reserve status shift is real but overstated dollar will share the stage.

The second light bulb, which needs to be distinguished from the first, was the status of the dollar or treasuries as reserve assets. This used to be a taboo topic. We've been writing about it for about 10 years following the global financial crisis. But that's the second takeaway, which is no longer a taboo topic. And a very popular formula or ratio you're going to start hearing is “the U.S. is X percent of this”. So, for example, the U.S. is 70% of ACWI compared to the Japan bubble when the U.S. was only 30. Or 40% of investment grade bonds are owned by offshore non-U.S. investors. And so that fits with dollar weakness. Now, we should jump straight to our view on this, because we think the framing is wrong. And like I said, we've been writing about this for over 10 years. The proper framing is that the dollar is going to share its reserve status with other deserving currencies over time and that's exactly what's happening. Malaysian ringgit bonds, Singapore dollar bonds, Korean won bonds, legitimate reserve assets. Central banks aren't just selling the treasuries and buying gold, they're buying other reserve assets and they don't send you a memo, of course.

EM currencies are the overlooked winner strong FX means lower rates and better returns.

The third takeaway is EM currency is the winner. That was a very, very, clear takeaway. And the position's not there, right? Participants do not have this view. There has been no inflow into bond markets in the last 10 years. But EM was a real winner. First, because of dollar depreciation, right? This should support EM currencies. And this will reduce inflation and inflation expectations, which means their duration. Remember, most people in markets, you ask them about duration, they're going to say, here's my opinion. That's dollar duration. But the Mexican and Bono curve is a different yield curve, and so is the Indonesian rupee curve. And when their currencies strengthen, inflation and inflation expectations come down, which means interest rates come down. Mexican peso's been unchanged this year, well, it's actually finally started rallying.

Way before the Mex peso rallied, their interest rates rallied. So Bonos had an incredibly lucrative year-to-date return, even before the FX rally. That's the third biggest takeaway, is that EMFX is a big winner. And market participants don't have the position on.

Thanks for watching.