On December 18, 2024, the Federal Reserve implemented a 'hawkish cut,' prompting a reassessment of future interest rates, indicating that the current policy rate of 4.38% is unlikely to drop below 4% in the near future.

As U.S. Treasury yields rise following this Fed decision and inflation forecasts, the dollar has appreciated, which poses challenges for emerging markets that rely heavily on dollar funding.

Countries such as China, Brazil, South Korea, and India collectively hold around $1.5 trillion in U.S. Treasury securities, a factor that could influence demand for U.S. debt amid rising yields and fiscal concerns.

The trend of central banks depleting their cash reserves, often held in U.S. debt, could lead to higher Treasury yields, further complicating the financial landscape.

In a significant move, the Brazilian central bank intervened in the market by selling $5 billion in U.S. dollars, marking its largest single intervention since the currency floated in 1999.

Emerging economies are experiencing notable currency depreciations, with South Korea's won hitting a 15-year low, India's rupee reaching a record low, and Indonesia's rupiah declining to a four-month low, prompting central bank interventions.

In October 2024, capital outflows from emerging markets, excluding China, totaled $33 billion, with the overall figure including China reaching $105 billion, marking the largest monthly outflow since June 2022.

China, the largest holder of U.S. Treasuries, is believed to have sold dollars to support the yuan amid its depreciation, reflecting the interconnectedness of global currencies.

The depreciation of currencies in emerging markets, such as Brazil's real losing over 20% in 2024, highlights the economic pressures these nations are facing.

As U.S. Treasury yields continue to increase, the strength of the dollar may deter foreign investments in U.S. markets, potentially leading to a correction in the currently expensive U.S. stock market.

The recent surge of the U.S. dollar has led central banks worldwide to sell dollar reserves in an effort to stabilize their local currencies, which may inadvertently strengthen the dollar further.

By mid-2024, the U.S. net international investment position (NIIP) reached a deficit of $22.5 trillion, representing 77% of GDP, underscoring the increasing liabilities driven by foreign investments.