The US dollar (USD) has weakened recently but remains historically expensive compared with most currencies. If the slide in the world’s go-to currency persists, however, we believe it could support a recovery for emerging-market (EM) stocks and bonds.
How Does a Weaker Dollar Help EM Assets?
A falling dollar supports EM assets mainly through three mechanisms. First, a weaker dollar can attract more inflows as investors seek higher returns in a depreciating-dollar environment, potentially stimulating corporate and economic growth as well. Moreover, bond issuers benefit when the cost to service their debt drops, since many EM sovereigns and corporate bonds are denominated in US dollars. Commodities prices, a key driver across many EM economies, also tend to rise when the dollar weakens—another potential tailwind. Of course, President Trump’s rapidly shifting tariff agenda continues to add layers of unpredictability and risk to the equation, which could change the dynamics of these mechanisms.
It’s uncertain if the USD will fall from here, particularly since US policy direction remains in flux. But we see ample room for more weakening. In fact, the dollar’s strength is near long-term peaks based on the real effective exchange rate, a measure of a broad basket of country currencies adjusted for inflation. The greenback hasn’t been this strong since 1985, when it forced the then G5 to reach the Plaza Accord, a devaluation agreement in the interest of healthy global trade and economic balance.
Revisiting the Dollar’s Journey
The USD’s valuation path in the last two decades especially supports our case for EM assets (Display). EM stocks, for instance, outperformed developed market equities as the dollar weakened or stabilized, which occurred from 2004 to 2011.
