Emerging Markets and a Falling Dollar: Risk Assets Around the World Stand to Benefit from a Weaker U.S. Currency

If you’re not a currency trader or haven’t traveled abroad in the last year, you may not know that the U.S. dollar has dropped to its lowest level against other currencies in 15 months. And the decline of the world financial system’s linchpin currency is only quickening as the U.S. Fed nears the end of its rate-hiking cycle. In this environment, a wide range of assets stand to profit, not least of which is the AI-infused U.S. technology sector. However, no space stands more ready to benefit from this environment than emerging markets.


Historically, emerging market (EM) equities have displayed an inverse relationship to the dollar, primarily because EM companies, just like their home countries, have funded growth with dollar-denominated debt. A cheaper U.S. dollar shrinks balance sheets and reduces net interest expenses, resulting in a combination that often leads to upward earnings revisions. And, while the dollar is already down more than 10% from its 20-year high in 2022, it’s reasonable to think the Fed’s recent rate-hike pause signals even further weakness. The U.S. central bank’s behavior, in other words, could be a catalyst for EM outperformance.

So, too, will be the behavior of other central banks. European central banks are close to a year behind the Fed in the rate hike process, and still not sure when their rates will stabilize. Meanwhile in Japan, rising wages and prices continue to put pressure on the Bank of Japan to relax efforts to keep their yield curve low. These shifts in the balance of monetary policy will result in more flows out of the US into foreign bonds, weakening dollar demand.