The weakening US dollar sparks a surge in carry trades, and emerging markets are about to face a “capital tsunami.”

According to Jinse Finance App, analysts have pointed out that as the U.S. Treasury's Treasury bond buyback plan weakens the U.S. dollar, investors seeking new opportunities may drive funds into emerging markets.

Last month, U.S. Treasury Secretary Janet Yellen doubled the scale of planned buybacks of long-term U.S. government bonds to ease the pressure from soaring long-term yields caused by market concerns over inflation and debt.

Robin Brooks, a senior fellow at the Brookings Institution, stated in an article last week that the market is looking for places that can "bypass the debt frenzy."

Brooks said that as some major developed economies seek to lower long-term government bond yields, emerging markets are expected to attract "massive capital inflows," which will ultimately provide support for carry trades—borrowing in cheap currencies to invest in higher-yielding assets.

He noted that the biggest risk facing carry trades, namely a sudden spike in borrowing costs, has been alleviated by U.S. government intervention.

According to data from TD Securities, global emerging market bond funds recorded an inflow of $967 million in the week ending Wednesday, an increase of about 15% compared to the previous week, despite an overall slowdown in bond fund inflows.

As investors seek safe havens, gold prices have also benefited from Yellen’s intervention measures, and institutions such as Deutsche Bank and Bridgewater Associates founder Ray Dalio have all expressed support for this precious metal.

Peter Kinsella, Head of Global FX Strategy at Union Bancaire Privée in London, said the Treasury's announcement sent a signal to the market that "the U.S. may adopt policies similar to financial repression." He added, “This has led to a weaker dollar, benefiting high-yielding G10 currencies and emerging market currencies.”

According to data from the London Stock Exchange Group (LSEG), since Yellen announced the bond buyback, the South Korean won has risen 2.83% against the U.S. dollar, the Brazilian real by 0.64%, and the South African rand by 0.59%.

Kinsella pointed out that a supportive macro environment for strong carry trade performance—such as low volatility and a widespread decline in inflation—remains “firmly in place.”

He said Brazil and Turkey are particularly favored among emerging markets, as they continue to offer high nominal and real yields even after inflation is taken into account. He added that within the G10 currencies, the Australian and Norwegian currencies are more favored.

Brazil has one of the highest real interest rates among major economies. As of mid-August, its benchmark rate stood at 14%, while 12-month inflation was 4.2%.

The Central Bank of the Republic of Turkey kept its one-week repo rate unchanged at 37% in July, despite the country’s annual inflation rate being 31.75%.

Wee Khoon Chong, APAC macro strategist at BNY Mellon in Hong Kong, said that Colombia has been “very popular” for carry trades this year.

As of last Friday, the country’s currency has risen around 20% year-to-date, and the benchmark stock index COLCAP has also increased by about 20%.

On the other hand, Eric Robertson, Chief Strategist at Standard Chartered, said on Monday that Asian currencies are expected to continue lagging their emerging market peers, making them less attractive as investment targets.

He noted that, compared to other currencies, Asian currencies typically offer lower implied yields, a pattern that may persist if the Federal Reserve turns to rate hikes.

The Reserve Bank of India’s policy interest rate is one of the highest in Asia at 5.25%, but it is still only about a third of Brazil’s.

Brooks pointed out that, given that emerging markets have previously experienced “large-scale capital outflows” due to the Iran war, carry trades funded by the U.S. dollar have only just begun.

He added that the Treasury’s bond buyback announcement suggests that, over time, “more places might introduce more powerful measures.”