Despite its deep liquidity, the global foreign exchange market remains vulnerable to macrofinancial uncertainty. Shocks can raise funding costs, widen bid-ask spreads, and intensify excess exchange rate return volatility. These pressures are amplified by structural vulnerabilities including currency mismatches, concentrated dealer activity, and greater NBFI participation. Stress in foreign exchange markets can spill over other asset classes, tightening broader financial conditions.
Increased local currency sovereign bond issuance and domestic absorption have supported emerging market resilience, but financial stability risks could arise from heavy borrowing, overreliance on narrow investor bases, and inadequate policy frameworks.