Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / Why the Strong Dollar Is Squeezing Emerging Market Imports
Transcript
- Lucas: Let's talk about the dollar. The trade-weighted US dollar index hit 119.3 as of mid-May, up from around 118.7 just a couple weeks earlier. That might not sound like a huge move, but for a lot of emerging economies, it's the difference between manageable inflation and a real headache. Luna: We talk a lot about dollar strength from the investor angle — what it means for EM stocks, for debt repayments. But I think the import channel is the one that really hits home for people on the ground. Lucas: Exactly. And that's the angle I want to drill into today. Because when the dollar strengthens, everything priced in dollars gets more expensive for countries that import those goods. And a lot of emerging markets are net importers of food, energy, and industrial inputs. Luna: So which countries are feeling it most right now? We're recording this on May 26, and the dollar has been grinding higher for months. Lucas: Turkey is the classic case. The lira has been under pressure for years, but this latest leg of dollar strength is compounding things. Turkey imports almost all of its energy, and energy is priced in dollars. So the lira weakens, energy costs rise, and that feeds directly into inflation, which was already running hot. Luna: And the central bank there has been walking a tightrope — trying to support the lira without choking off growth. How's that going? Lucas: It's not going great. The central bank has been intervening, but they've also been cutting rates in real terms, which is a gamble. The market is betting they'll have to hike again before year-end. The lira has lost about 12 percent against the dollar so far this year. Luna: Then there's Indonesia. The rupiah is down, and they import a lot of food and machinery. The central bank there has actually been raising rates preemptively to try to stabilize the currency. Lucas: Bank Indonesia has been one of the more proactive central banks in emerging Asia. They hiked rates earlier this year when the dollar started moving, and they've been intervening in the forex market. But the trade-off is that higher rates can slow domestic demand, and Indonesia's growth story is still heavily dependent on consumption. Luna: So they're basically choosing between a weaker currency and a slower economy. Neither is great. Lucas: Right. And this isn't just a Turkey or Indonesia problem. Look at the broader picture: the dollar index is at levels we haven't seen since the early 2000s. The yuan is at 6.81 per dollar, the yen at 158.7. For emerging markets that import from China or Japan, those currency moves matter too. Luna: Because if the yuan is weak against the dollar, Chinese goods become cheaper globally, which can help some EM importers. But if the yuan weakens and the dollar strengthens, it's a double-edged sword. Lucas: Exactly. An EM country that imports from China might get cheaper goods in dollar terms, but if they also export commodities priced in dollars, the currency mismatch can hurt. The real pain comes for countries that have to import food and fuel — those are non-negotiable, so the demand is inelastic. Luna: Do you think this dollar strength is structural or just a temporary spike? Because the Fed's policy rate is high, but markets are expecting cuts later this year. Lucas: That's the trillion-dollar question. The market is pricing in about two rate cuts by the end of 2026, but the Fed has been pushing back. If the dollar stays strong through the second half of the year, EM central banks are going to be in a tough spot. They can either let their currencies slide and import inflation, or hike rates and slow their economies. Luna: And if they let the currency slide too far, they risk a full-blown currency crisis, like we've seen in the past — 2018, 2014, the Asian financial crisis. Lucas: Right. And the countries that are most vulnerable are the ones with large current account deficits and high dollar-denominated debt. Turkey's current account deficit was running at about 2 percent of GDP. Indonesia's is smaller, but they have corporate debt in dollars. Luna: Is there any good news? I mean, some emerging markets are net exporters of commodities — like Brazil, or Chile with copper. A strong dollar might hurt their import bill, but their export revenues are in dollars too. Lucas: That's the cushion. For commodity exporters, the dollar strength can actually boost local currency revenues when they repatriate earnings. But the catch is that commodity prices have been volatile. And if the dollar is strong because of global risk aversion, commodity demand could fall too. Luna: So it's not a clean hedge. Lucas: Not at all. Look at Brazil — the real has been relatively stable, partly because they export a lot, but also because the central bank has kept rates high. But even there, domestic inflation is persistent. The strong dollar adds upward pressure on imported goods, from electronics to fertilizers. Luna: Speaking of fertilizers, that's a big one for agricultural economies like India. They import a lot of fertilizers. And with the rupee under pressure, that input cost rises. Lucas: India's another interesting case. They import about 80 percent of their crude oil, so a strong dollar and high oil prices are a double whammy. The rupee has been fairly stable because the RBI has been intervening, but that burns through foreign reserves. They've lost about 20 billion dollars in reserves over the past few months. Luna: So the reserve buffer is shrinking. That's a concern if the dollar keeps rallying. Lucas: Exactly. And that's the pattern across a lot of EM: central banks are using reserves to smooth the adjustment, but those reserves aren't infinite. Eventually, they have to let the currency adjust or raise rates. Luna: Let's zoom out a bit. Why is the dollar so strong in the first place? Is it just the Fed being hawkish, or is there more to it? Lucas: It's a combination. The Fed is at 5.5 percent, which is high compared to most other developed economies. But also, the US economy has been relatively resilient — GDP growth, employment, corporate earnings. That attracts capital. And then there's geopolitical uncertainty — the situation in Iran, the Strait of Hormuz — which drives safe-haven flows into the dollar. Luna: So the dollar gets bid up for multiple reasons. And that creates a self-reinforcing cycle for EM: dollar strengthens, EM assets get sold, which weakens EM currencies further, which makes the dollar even stronger. Lucas: Exactly. And that's the vicious cycle that EM policymakers fear most. It's not just about the level of the dollar, it's about the speed of the move. A gradual appreciation is manageable. A sudden spike can cause a crisis. Luna: So what should investors watch? What's the canary in the coal mine? Lucas: I'd watch the Turkish lira and the Indonesian rupiah closely. If those currencies start to break down despite central bank intervention, that's a signal that the dollar strength is overwhelming. Also watch EM central bank rate decisions — if we see a wave of emergency rate hikes, that's a red flag. Luna: And on the flip side, if the Fed actually cuts rates later this year, that would take some pressure off. Lucas: It would. But the market has been wrong about Fed cuts before. So I'd caution against banking on that. The more likely scenario is that EM central banks have to keep rates higher for longer, which means slower growth. Luna: It's a tough environment for EM. But there are always winners and losers. Which countries are best positioned to weather this? Lucas: Commodity exporters with flexible exchange rates and strong reserves — think Chile, Peru. Also countries that have already done the adjustment, like South Korea, which let the won weaken significantly and has a current account surplus. And then there are the outliers like Vietnam, which we talked about a few episodes ago, that are attracting manufacturing investment regardless of the dollar. Luna: So the key is to be selective. Not all EM is the same. Lucas: Absolutely. And that's the core message for listeners: the strong dollar is a headwind, but it's not a death sentence. It depends on the country's external balance, reserve position, and policy credibility. Luna: And on that note — if walking through the economy with us has made something click, we'd love your support. It keeps this show ad-free and independent. You can find us at buy me a coffee dot com slash fexingo. Lucas: Yeah, even a small gesture goes a long way in helping us keep the conversation going. And it means we don't have to rely on corporate sponsors. Luna: Exactly. So back to the dollar — we've covered the import channel, but I'm curious: do you think EM central banks are coordinated enough to respond collectively? Or is it every country for itself? Lucas: Historically, it's every country for itself. There's no EM equivalent of the ECB or the Fed. But we've seen some coordination in the form of bilateral swap lines — the Fed has swap lines with a few EM central banks, and China has its own swap network. But those are limited in scale. Luna: So it's mostly unilateral action. And that can lead to competitive devaluations, which is a risk. Lucas: Right. If a bunch of EM countries let their currencies weaken at the same time, it could trigger a round of currency wars. That's not good for anyone. But for now, most central banks are trying to manage the decline, not accelerate it. Luna: Alright, let's leave it there for today. Thanks for joining us on The Emerging Markets Podcast. Lucas: Stay curious, and we'll see you next time.