Will the Strong Dollar Continue to Threaten Emerging Markets?

Historically when the US dollar is strong, emerging markets do not perform well - and 2015 has been no exception. Will the dollar index continue its damaging rally next year?

Emma Wall 8 December, 2015 | 11:48AM

Over the past five years the DXY dollar index has grown around 40% – while emerging markets have struggled to recover to pre-credit crisis levels. Thanks to quantitative easing and record low interest rates the US has dragged itself out of recession – and now, poised on the edge of a rate rise it has a strong currency and the GDP growth to prove it.

History shows that a strong US dollar has not been kind to emerging markets and Asian equities, points out Samir Mehta, senior fund manager at JO Hambro Capital Management, and this cycle is no different.

“Asia is a heterogeneous region with one unifying factor – that when the US dollar is strong it struggles,” said Mehta. “When the dollar is weak, cash floods into emerging markets. Credit is easy to come by and corporates and consumer make bad investment decisions – borrowing to buy retail space, houses and cars. As the dollar strengthens liquidity falls, rates rise and people have less cash to spend which leads to economic slowdown. Businesses which were propped up by cheap debt have to restructure or go bankrupt.”

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About Author

Emma Wall  is former Senior International Editor for Morningstar

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