Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / How the Strong Dollar Is Quietly Reshaping Emerging Market Trade
Transcript
- Lucas: So the US dollar is strong — really strong. The trade-weighted index is just shy of 120 as of late May, hovering near levels we haven't seen since the early 2000s. And for emerging markets, the conventional playbook says that should be a headwind. But when you look at the ETF data this week, the picture is much more complicated. Luna: Yeah, because we're seeing some EM markets absolutely rip. Korea's EWY is up almost 11 percent in five days. Taiwan's up over 8 percent. Meanwhile China's FXI is down 2.5 percent and the KWEB internet ETF is off 3.5 percent. So the strong dollar isn't hitting everything equally. Lucas: Right. And that divergence is the story. The strong dollar narrative tends to treat 'emerging markets' as a monolith — like they all get squeezed when the dollar rises because they have dollar-denominated debt and import costs go up. But in reality, the impact depends on whether you're a net exporter or a net importer, and what you're exporting. Luna: Before we go deeper — and this ties in, I promise — one thing I always appreciate about this show is that we don't have ad breaks interrupting this kind of analysis. It's a choice we made early on. Lucas: Absolutely. The whole Fexingo Business network runs ad-free. So if you're getting value from these conversations and want to support that model, the easiest way is buy me a coffee dot com slash fexingo. It's a small gesture that keeps us independent. Luna: Yeah. And it means we can spend the whole episode on something like this dollar paradox without cutting away. So Lucas, you were saying — it's not a monolith. Lucas: Exactly. So let's look at the trade data. US imports of goods and services are running at about 4.4 trillion dollars annualized as of January, exports at 3.5 trillion. That gap — the trade deficit — is about 60 billion a month. And the strong dollar makes US imports cheaper, which should help EM exporters, but it also makes their dollar-denominated debt more expensive. The question is who benefits and who gets squeezed. Luna: Korea and Taiwan seem to be benefiting. Their currencies have weakened, their exports are competitive, and they're plugged into the AI supply chain. Korea's memory chip revival is real — we talked about that a few episodes ago. But the scale of this move is striking. Lucas: Yeah, EWY up nearly 11 percent in a week is not just a chip story. It's a macro story. The won has weakened against the dollar, which makes Korean cars, ships, and electronics cheaper in global markets. And because Korea is a net exporter with a current account surplus, the strong dollar actually improves their trade balance in local currency terms. It's a tailwind. Luna: Then you look at China. The yuan has weakened too — it's at 6.79 per dollar, down from about 6.80 a week ago, but it hasn't moved much. And Chinese equities are down. FXI off 2.5 percent, MCHI off 1.7 percent. The strong dollar plus trade tensions is a double whammy. Lucas: China's situation is different because it's not just about the exchange rate. China is running a massive trade surplus, but it's also got capital outflows and a property sector that's still in the doldrums. The strong dollar makes it harder for Beijing to stimulate domestically because they're trying to keep the yuan from falling too fast. So the PBOC is walking a tightrope. Luna: And then there's Brazil and Mexico. EWZ is down 2.4 percent in the last five days, EWW is up but only 1.3 percent. Commodity exporters like Brazil get hit because stronger dollar often means lower commodity prices, since commodities are priced in dollars. So the playbook works there. Lucas: Right. So you have three distinct regimes. Manufacturing exporters in Asia with weak currencies and AI demand — they win. Commodity exporters in Latin America — they lose. And then China, which is kind of its own category because it's the world's factory but also a huge consumer market, and it's got structural headwinds that have nothing to do with the dollar. Luna: The numbers bear that out. The US trade-weighted dollar index is still at 119.3, essentially flat from last week. So the dollar isn't strengthening further right now, but it's staying high. And that persistent strength is what matters for EM — it's not a one-week shock, it's a regime. Lucas: And the Fed is not cutting anytime soon. The market has been pushing out rate cut expectations all year. The ten-year Treasury yield is still elevated, which keeps the dollar bid. So this strong dollar regime could persist for a while. Luna: What does that mean for EM debt? A lot of emerging market corporations and governments borrowed in dollars during the low-rate years. Now they have to service that debt with stronger dollars and weaker local currencies. That's a classic EM stress point. Lucas: It is. But here's the interesting thing — the worst-case scenario hasn't materialized. We haven't seen a wave of EM defaults in 2026, not like the early 2000s or the 2015 taper tantrum. Partly because many EM countries have built up foreign exchange reserves, partly because they've shifted more borrowing into local currency. So the system is more resilient than it used to be. Luna: Still, if you look at the winners and losers this week, it's stark. Korea up 10.7 percent, Taiwan up 8.3 percent. India up 1.4 percent, which is steady. But China, Brazil, and the broader EEM — which is only up 3.9 percent over five days — the divergence is extreme. Lucas: And that divergence is where the opportunity is, if you're an investor. The old approach of buying a broad EM ETF like EEM or VWO and expecting uniform growth is probably not optimal in this environment. You need to be selective. The strong dollar is a filter — it separates the markets that can adapt from the ones that can't. Luna: So which markets are best positioned if the dollar stays strong? Korea and Taiwan are obvious, but they're also expensive now after this rally. Any hidden plays? Lucas: I'd keep an eye on India. INDA is up only 1.4 percent this week, but India has a large domestic economy, less reliance on exports, and its currency is managed by the RBI. They've built up reserves. So they're less vulnerable to dollar swings. Also, some smaller Southeast Asian markets like Vietnam and Indonesia could benefit from supply chain shifts away from China. But you have to look at each country's trade balance, debt profile, and political stability. Luna: And what about the currency itself? The dollar index ticked down from 119.37 to 119.3 — barely a move. But if the dollar were to weaken on a Fed pivot, the whole dynamic flips. Then commodity exporters like Brazil could rally, and the Asian export plays might cool off. Lucas: Exactly. That's the macro trade. But predicting the Fed is a fool's errand. What we can say is that right now, on May 29, 2026, the dollar is strong, the EM landscape is fractured, and the old playbook of 'strong dollar equals bad for all EM' is too simple. The real story is about which economies have built buffers and which are exposed. Luna: And that's a more useful framework for investors, honestly. Instead of asking 'is the dollar strong or weak?', ask 'who benefits from current conditions?' Lucas: Right. And the data this week is screaming that answer. Korea, Taiwan, and to a lesser extent India are the ones that are thriving. China and Brazil are struggling. That's not a judgment, it's just the math of trade and currency. The question for the next few months is whether this divergence widens or narrows. Luna: And whether the dollar holds here or breaks one way or the other. The yuan at 6.79 — if it weakens further, that could change the calculus for the whole region. Lucas: It could. A weaker yuan would make Chinese exports more competitive, which could put pressure on Korea and Taiwan. But it would also increase capital flight fears. So the PBOC is in a tough spot. They don't want a sharp devaluation, but they also don't want to burn reserves defending a level. Luna: So the takeaway for someone listening — if you're investing in EM right now, the strong dollar isn't a reason to avoid the asset class entirely. It's a reason to be picky. Focus on net exporters, strong balance sheets, and countries with policy credibility. Lucas: And keep watching the trade data. The US trade deficit is running at 60 billion a month. If that widens, it could fuel political pressure for tariffs or a weaker dollar policy. If it narrows, the dollar might stay strong. Either way, the next few months will tell us a lot about which EM stories are durable and which are just riding the wave. Luna: Alright, that's a good place to leave it. Thanks for listening — we'll be back next week with another angle on the emerging markets landscape.