Emerging Markets: The Dollar Effect

Written by: Global Thought Leadership | June 29, 2018

Source: Bloomberg, June 29, 2018. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.



  • Emerging Market (EM) equities have had a difficult 2018 so far, falling -11.8% in local currency terms since the peak on January 26.
  • Explanations abound, including the effect of disarray in global trade policy, country-specific challenges in Turkey, Argentina and Brazil, and a drawdown of global liquidity due to the start of the unwinding of global central bank largesse.
  • But the decline has been particularly painful for U.S. dollar-based investors because of the U.S. dollar’s recent rise against most of the world’s currencies. For them, EM returns have fallen -16.9% since this year’s peak.
  • Clearly, there are some forces restraining EM economies that have little to do with the U.S.  Internal factors, including political turmoil, have hurt several major players including Brazil, Turkey, South Africa and Argentina.
  • But the dollar’s rise is not helping dollar-based investors. Reasons for the greenback’s rise include the visibility of U.S. economic growth in 2017 and the first half of 2018, the continued moderate pace of inflation, the ability of financial assets to absorb the beginning of the Fed’s rising rate regime, and the expectation of positive fiscal impact of increased government spending.
  • For U.S. based investors, all this has meant an end of the “free ride” in incremental return provided by appreciating EM currencies since the end of 2016 as their economies as a group gain in financial strength and access to global sources of capital.
  • The bottom line: The variety of successes and failures within EM  is a key reason for investors to focus on country and company specifics – including currency dynamics – rather than on the behavior of the asset class overall – the kind of focus that can be provided by fundamentals-driven active management of this asset class.


All data Source: Bloomberg, June 28, 2018.


The MSCI EM (Emerging Markets) Index, priced in local currencies or in U.S. dollars, is a free-float weighted equity index that captures large and mid cap representation across Emerging Markets (EM) countries. 

The Bloomberg Dollar Spot Index tracks the performance of a basket of ten leading global currencies versus the U.S. Dollar. Each currency  in the basket and their weight is determined annually based on their share of international trade and FX liquidity.


Active management does not ensure gains or protect against market declines.

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