Latest / International Business with Fexingo: Global Trade, Cross-Border Deals, and Multinational Operations / How the Strong Dollar Is Crushing Emerging Market Economies
Transcript
- Lucas: The US trade deficit just widened to nearly seventy-eight billion dollars in May. That's up more than forty percent from the prior month. Luna: That's a massive swing. Is that all because of the strong dollar? Lucas: A big part of it. The trade-weighted dollar index hit 120.5 last week. That's near multi-decade highs. American consumers are importing more because foreign goods are cheaper in dollar terms, but US exports become more expensive for everyone else. Luna: And that's showing up in emerging markets pretty brutally. Look at South Korea — the EWY ETF dropped eight percent in the last five days alone. Lucas: Right. Korea is a classic canary. It's a major exporter of semiconductors, ships, and autos. When the dollar strengthens, Korean goods become pricier in dollar-denominated markets, and their corporate debt — much of it borrowed in dollars — gets more expensive to service. Luna: Taiwan is in a similar spot. The iShares MSCI Taiwan ETF is down almost six percent over the same period. Lucas: And those two economies are linchpins in the global semiconductor supply chain. If their export earnings shrink, it cascades through the whole tech trade. Luna: Meanwhile, China's yuan is holding steady at 6.78 per dollar. Flat over the last month. How are they managing that? Lucas: The People's Bank of China is tightly managing the yuan through state bank intervention and capital controls. They're letting it depreciate slowly but not crash. The FXI, the China large-cap ETF, is actually up nearly four percent this week — a rare bright spot. Luna: But that's China propping it up. For smaller economies without deep reserves, it's a different story. Lucas: Exactly. Take Turkey or Argentina — countries with chronic current account deficits and dollar-denominated debt. A stronger dollar raises their import bills for energy and food, fuels domestic inflation, and makes debt repayment harder. Luna: And now with oil prices elevated because of renewed fighting in the Middle East, that pressure is even worse for net oil importers. Lucas: The Strait of Hormuz disruption is a real factor. Even if you're not a direct combatant, you pay more at the pump. For emerging markets that import oil, it's a double hit: dollar strength plus higher crude prices. Luna: So who benefits in this environment? Aside from the US consumer getting cheaper imports. Lucas: Mexico is an interesting case. It's actually benefiting from nearshoring — companies moving production closer to the US. The EWW ETF is down only slightly this week, and Mexico's export base is increasingly manufacturing, not commodities. They're less exposed to the dollar debt trap because a lot of their trade is in dollars already. Luna: But even Mexico is feeling the interest rate squeeze. If the Fed stays tight to fight inflation, capital flows out of emerging markets into US assets. Lucas: And that's exactly what we're seeing. The yield on the ten-year Treasury is still elevated, and Jay Dimon just said he wouldn't buy stocks or Treasuries at current prices because he thinks markets are underestimating risk. Luna: He's been warning about this for a while — the whole 'geopolitical turmoil plus inflation' cocktail. Lucas: The thing is, the dollar strength isn't just about Fed policy. It's also a safe-haven bid. When the Middle East conflict escalates, investors pile into dollars and US bonds, which pushes the dollar even higher. It's a self-reinforcing loop. Luna: And that loop crushes emerging market currencies. The Korean won, the Indian rupee, the Brazilian real — all under pressure. Lucas: Brazil's ETF is down one and a half percent in the past week. India's down slightly. But the bigger story might be what happens next if the dollar keeps rallying. Luna: Are we talking about a full-blown emerging market debt crisis? Lucas: It's a real risk. Several countries have debt payments coming due later this year. If the dollar stays strong and commodity prices stay high, you could see defaults or forced IMF programs. Luna: And the Fed is stuck — they can't cut rates if inflation stays sticky because of energy costs, but not cutting keeps the dollar strong and hurts the rest of the world. Lucas: Exactly. That tension is the core of the story right now. And it's why we spend so much time tracking these global flows. If you find these conversations useful for your work or just to make sense of the world, a few listeners help keep the show ad-free by supporting at buy me a coffee dot com slash fexingo. It's a small thing that makes a big difference. Luna: Yeah, it's what lets us keep digging into these specific data points without any sponsor interruptions. Lucas: So back to the dollar — historically, when the Fed eventually does pivot, the dollar can weaken sharply, which would relieve a lot of pressure on emerging markets. But the timing is uncertain. Luna: Are you betting on a pivot this year? Lucas: I think the market is pricing in at least one cut by year-end, but I'm skeptical. Inflation is still above target, and the war in the Middle East keeps energy prices elevated. The Fed might need to hold steady longer than people expect. Luna: So for now, the strong dollar continues to reshape global trade, benefiting some but punishing many. Lucas: And that's the reality of international business in mid-2026: a dollar that's too strong for the rest of the world, but too important to ignore.