Emerging markets were hit hard by the resurgence of the "Trump trade” Wednesday as the dollar and U.S. yields soared following Donald Trump’s victory in the U.S. presidential race.

Currencies in Eastern Europe led losses, sending the emerging-market currency gauge to its worst day since February 2023. The Mexican peso, often seen as the most vulnerable to Trump’s trade policies, edged higher in a volatile session. Earlier in the day, the currency slumped as much as 3.5%.

Traders are still uncertain over how a second Trump presidency will affect developing economies. His pledges of stronger restrictions on imports and immigration are fueling bets on higher U.S. borrowing costs and a stronger greenback, dragging down other currencies.

"Trade tariffs and other Trump administration policies may be inflationary for the U.S.,” according to Tom Wilson, head of emerging-market equities at Schroder Investment Management. "The expected outcome would be dollar strength, higher inflation, less easing from the Fed and a higher U.S. yield curve. All of this is broadly unhelpful for EM equity returns, pressuring currencies and limiting freedom of action for central banks.”

The MSCI Emerging Market equity index fell 0.6%, dragged lower by Asian stocks as traders priced in punitive tariffs for the world’s second-biggest economy.

It was Trump’s trade war against China during his first term that halted an EM equity rally and sparked an underperformance versus the U.S. that continues to this day. China’s stock indexes in Hong Kong slid more than 2.5%.

Traders had been preparing for a Trump victory in recent weeks, with currency volatility soaring in the lead-up to the vote, likely easing the blow as the session wore on today.

The Republican’s proposals to impose tariffs would hit Mexico — the largest trade partner with the U.S. — particularly hard. On the campaign trail, Trump said automakers building plants in Mexico are a "serious threat” to the U.S.

"There had been a de-risking of certain Latam currencies in the days and weeks prior to the election so this may help explain the move,” said Bret Rosen, economist and strategist for Latin America at EMSO Asset Management.

The Mexican peso edged higher at the end of trading in New York, while the Brazilian real erased earlier losses to lead gains among developing nation currencies. Despite the peso rallying up in some instances throughout the afternoon, a Trump presidency still poses risks to the currency ahead, according to Alejandro Cuadrado, strategist at BBVA.

"The election result is not MXN positive as it will keep volatility lingering on risks of tariffs and political or headline noise, but a lot is also priced and there can be even opportunities if tariffs,” said Cuadrado.

Ukraine bonds, meanwhile, rose Wednesday, leading EM gains. Trump has repeatedly stated that he would quickly end the war between Russia and Ukraine if re-elected, and force Europe to take on more of the cost of paying for that conflict.

Other high-yielding credits which are seen as benefiting from a Trump administration, such as Argentina and Venezuela, also rallied.

Emerging markets already face a host of macro challenges, many of which could be compounded by Trump’s policy proposals. China’s economy remains mired in a deflationary spiral despite hundreds of billions of dollars in monetary stimulus, while the conflicts in Ukraine and the Middle East have geopolitical risks top of mind for investors.

Even the Fed’s long-awaited interest-rate cut ultimately proved a non-starter for those hoping it would kick-start an EM recovery. Now, Trump’s pledges on tariffs, immigration and tax cuts could put pressure on inflation.

The U.S. election result "opens the door to a stronger U.S. dollar, higher U.S. real rates, and tariff policies that disproportionately damage EM exporters,” said Ed Al-Hussainy, a New York-based strategist at Columbia Threadneedle. "We’re likely to see more weakness in the asset class, across local rates, FX, and high beta credit.”