Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / How the Strong Dollar Is Crushing Emerging Market Stocks in June 2026
Transcript
- Lucas: Let's start with a number that tells a pretty uncomfortable story for emerging markets right now. The EEM — the big emerging market ETF — closed yesterday at sixty-seven ninety-six. That's down four percent in just five days. Luna: And that's not even the worst of it. The China-specific ETF, FXI, dropped almost five percent in the same window. Alibaba alone lost eleven percent this week. Lucas: Right. And if you zoom out, the common thread tying this together is the U.S. dollar. The trade-weighted dollar index hit 120.4 as of last Thursday. That's the highest level since the early 2000s. Luna: So when the dollar strengthens, it's not just an abstract FX move. It directly hits companies that borrowed in dollars, it makes their exports more expensive, and it pulls capital out of riskier markets back into U.S. Treasuries. Lucas: Exactly. And we're seeing that play out in real time. The yield on the ten-year Treasury is still elevated, so dollar-denominated bonds look attractive. That means money that might have gone into Indian or Indonesian equities is instead buying U.S. government debt. Luna: I want to highlight one country that actually bucked the trend this week. Brazil's EWZ was up one point three percent. Why is Brazil different? Lucas: Brazil is interesting because their central bank started hiking rates much earlier than most EM peers. The Selic rate is already high, so the real has held up better against the dollar. Plus, Brazil is a commodity exporter — iron ore, soy, oil — and commodity prices in dollar terms actually provide a cushion when the dollar strengthens. Luna: So it's not a uniform EM sell-off. It's a divergence based on each country's trade balance, debt profile, and monetary policy credibility. Lucas: Exactly. South Korea, for example, got hammered. EWY dropped six and a half percent this week. The won is weak, tech exports are slowing, and the country's highly correlated with the global semiconductor cycle. That's a triple hit. Luna: And then you have China, which is its own story. The yuan is at 6.77 per dollar, which is near multi-year lows. That pressures the PBOC — if they ease to stimulate growth, the yuan weakens further, which spooks foreign investors. If they defend the currency, they tighten liquidity, which hurts domestic stocks. Lucas: It's a classic policy trap. And the data we have from April shows the U.S. trade deficit narrowing slightly to fifty-five point nine billion dollars. That's partly because a strong dollar makes imports cheaper, but it also means U.S. consumers are buying more foreign goods — just at better prices for them. Meanwhile, EM exporters get squeezed on volume and margin. Luna: So what's the outlook from here? Is this a short-term spike in the dollar or something more structural? Lucas: I think it's more structural than people want to admit. The Federal Reserve is still in tightening mode relative to other major central banks. The Bank of Japan is keeping rates ultra-low, so the yen keeps falling — it's at 161 per dollar now. The ECB is also behind the curve. So dollar strength has a fundamental interest-rate differential backing it. Luna: That means EM central banks are forced to raise rates just to defend their currencies, even if their domestic economies are slowing. That's a recipe for a hard landing in some of the more leveraged markets. Lucas: Yes. And look at the countries that are most vulnerable: those with large current account deficits and high dollar-denominated debt. Turkey, Argentina, even parts of Southeast Asia. The current account data we have from Q1 shows the U.S. deficit widening again — that's actually a mirror of surpluses in some EM economies, but the capital flows are still moving against them. Luna: One thing I keep thinking about is the 2022 dollar rally. That was also brutal for EM. But this time feels different because the dollar is starting from a higher base and the global growth outlook is weaker. China isn't rebounding the way people hoped. Lucas: Right. In 2022, there was still a narrative that EM could decouple. Now, with the KWEB index down over six percent this week and Chinese tech names like JD and Baidu dropping eight and seven percent respectively, the decoupling thesis is being tested hard. Luna: So for investors listening — and for anyone trying to understand what's driving their portfolio — the dollar is the single most important variable to watch right now. Lucas: Absolutely. And if walking through the economy with us has made something click, we want to mention that this show is deliberately ad-free. There's no sponsor pushing a narrative. If you find that valuable and want to support it, the link is buy me a coffee dot com slash fexingo. That's it. Luna: Yeah, it's a small gesture that helps us keep doing this without any outside pressure. We appreciate everyone who's chipped in. Lucas: So, back to the divergence theme. One of the counterintuitive winners in a strong-dollar environment is actually export-driven EM economies that have devalued enough to become ultra-competitive. Mexico, for instance — the EWW ETF is down this week, but over the past year it's held up better than most because of nearshoring demand. Luna: That's a good point. Mexico benefits from the us china trade shift regardless of the dollar. But even there, a stronger peso would hurt eventually. Lucas: Exactly. So the bottom line is: don't paint all emerging markets with the same brush. The dollar is a headwind for almost everyone, but some economies have built buffers — higher reserves, flexible exchange rates, diversified trade partners. The ones that haven't are the ones getting crushed this week. Luna: And that's the kind of granularity we try to bring every episode. Thanks for listening.