Why currency volatility could be the market’s ‘Achilles heel’ in 2025

• The year 2025 will be dominated by currency volatility which could lead to a “sharp” correction, KKR said.
• Trade wars, fiscal instability and geopolitical tensions will drive currency volatility.
• Currency jitters triggered market pullbacks in the late 1990s, KKR said.

Investors may be underestimating the threat that wild movements in the foreign exchange market pose to the bullish recovery.

KKR wrote this week in its 2025 outlook that currency fluctuations will become the market’s “Achilles heel” next year.

“Our conclusion is that now is not the time to take a lot of risk from excessive foreign exchange exposure, as this could turn out to be the dominant story of 2025,” he said.

The company said investors should prepare for trade wars and growing fiscal imbalances to increase foreign exchange volatility beyond recent norms.

Tariffs will likely upend global interest rate coordination, while economic frictions will cause further disruption. Monetary policy helps dictate exchange rate levels, and large changes can cause instability.

At the same time, high levels of public debt can reduce demand for a country’s currency, thereby triggering devaluations.

KKR urges investors to think about how the market performed between 1994 and 2000. After interest rate hikes first shook markets in 1994, the stock market continued to recover, similar to what has happened since 2022, KKR said.

“However, things were disrupted in 1998 as a combination of monetary unwinding and excessive debt led to a brief, sharp market correction that investors underestimated,” the outlook notes.

Investors can already see this happening in some markets.

Brazil’s debt and equity markets have been reeling this week amid a deep fall in the country’s real. The currency became the worst performer against the dollar, hitting an all-time low on Wednesday.

Brazilians have been abandoning the real since late November after proposed austerity measures failed to satisfy investors concerned about the country’s growing budget deficit.

KKR nevertheless remains largely optimistic for 2025. The company expects the S&P to reach 6,850 by the end of the year, before racing towards 7,500 in 2026.

“Of course, we expect a lot of volatility, consolidations and declines along the path to our 2025-2026 price targets,” KKR wrote, suggesting that investors pair mega-cap tech exposure with values cyclicals, as well as small and mid-caps. actions.