IMF Upgrades Global Growth Forecast as Weaker Dollar Provides Relief

The International Monetary Fund has raised its global growth forecast to 3.0% for 2025 and 3.1% for 2026, citing a weakening U.S. dollar, falling tariff pressures, and looser financial conditions across developed and emerging markets. The revisions reflect a more resilient global economy, despite persistent downside risks.

Dollar Decline Eases Pressure on Emerging Markets

The nearly 9% decline in the U.S. dollar over the past year has lowered the cost of servicing dollar-denominated debt for emerging markets and multinational borrowers. The IMF notes this shift has helped ease external vulnerabilities, particularly in lower-income countries and highly leveraged corporates.

Additionally, the effective U.S. tariff rate has dropped from over 24% in early 2025 to around 17%, reducing pressure on trade flows. Preemptive import activity ahead of policy changes also contributed to short-term growth acceleration, although the Fund warned that inventory build-up could mask underlying demand softness in some economies.

Growth Momentum Strengthens in Key Regions

The IMF raised its forecast for the U.S. economy to 1.9% in 2025 and 2.0% in 2026, supported by consumer resilience, labor market strength, and softer trade frictions. China’s projection was lifted to 4.8%, aided by monetary stimulus and improved export volumes, while India remains the top performer among major economies, with growth projected at 6.4%.

Among G7 economies, the UK received a modest upgrade to 1.2%, ranking third on the back of stronger-than-expected performance in services and public investment.

Fragile Stability Underscored by Geopolitical Risks

Despite the upgraded outlook, the IMF flagged significant tail risks. Geopolitical tensions, particularly in Eastern Europe and the South China Sea, remain a threat to global sentiment. The Fund also highlighted the potential impact of political interference in monetary policy, especially in the United States, where upcoming elections could test the Federal Reserve’s independence.

While inflation continues to decline globally, the IMF warned that low price momentum may reflect underlying demand weakness. A sudden shift in investor expectations or a policy misstep could trigger renewed volatility.

Market Reaction and Financial Flows

Investor appetite for emerging markets has surged in recent months, with MSCI’s EM Index up nearly 17% year-to-date. Gains have been concentrated in Chinese equities, Latin American bonds, and frontier market currencies—areas that have historically responded favorably to dollar weakness and looser credit conditions.

Still, strategists warn the rally is vulnerable. A sharp rebound in the dollar, a surprise tightening of trade policy, or renewed inflationary pressure in developed markets could unwind recent gains. Sovereign debt markets, in particular, remain sensitive to U.S. rate expectations and global risk appetite.

Commodity-importing economies have benefited from lower oil prices, but exporters may face pressure if global demand softens. The IMF noted that while energy prices have stabilized, a downturn in industrial production could weigh on both fiscal revenues and currencies in resource-heavy economies.

Tips for Traders

• Track the U.S. dollar index (DXY) closely—further declines could sustain momentum in emerging market assets, but any reversal may trigger sharp outflows.

• Watch sovereign bond spreads in Latin America and Africa—gains in Q3 may be vulnerable to U.S. yield repricing or credit events.

• Follow macro data out of India and China—positive surprises could support equities and FX positioning in Asia.

• Monitor global tariff developments and trade policy shifts, particularly from the U.S. or EU, which could alter cross-border capital flows.

• Consider rotating into commodity-sensitive currencies selectively—oil importers may outperform if crude prices remain contained.