Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / How the Strong Dollar Is Splitting Emerging Markets Three Ways
Transcript
- Lucas: You look at the trade-weighted dollar index and it's sitting at 120.7 as of last week — down a hair from 121.15, but still historically elevated. And when you overlay that on emerging markets right now, you don't get one story. You get three. Luna: Three different EM narratives unfolding at the same time? Lucas: Exactly. And they're diverging in ways that reward precision and punish anyone who lumps all EM together. The first bucket is China — where we've seen a real rally in Chinese equities despite the yuan being under pressure. The FXI, the China large-cap ETF, is up three percent over the past five days. Alibaba alone jumped nearly fifteen percent in that window. Luna: And that's happening with the yuan basically flat around 6.79 per dollar. So the currency isn't leading, it's stocks playing catch-up on stimulus hopes. Lucas: Right. The currency stability is partly Beijing managing the fix every morning — they're not letting the yuan weaken aggressively because they know it would spook capital flows. So you have an equity rally that's decoupled from the currency. That's very different from, say, 2015 when a China selloff hit both stocks and the yuan simultaneously. Luna: And the second bucket? Lucas: Latin America — specifically countries like Brazil and Mexico that are net exporters. The weaker local currencies actually help them. Brazil's real has depreciated significantly, and the EWZ ETF is up almost three percent in the last five days. Mexican stocks, via the EWW, are down a bit over two percent — but that's more about manufacturing slowdown fears than the currency itself. Luna: So the strong dollar is a tailwind for exporters because their goods become cheaper globally. But if you're a country that imports a lot — like, say, India — it's a headwind. Lucas: Exactly. India's INDA ETF is down 1.2 percent in the past five days. India imports a ton of energy and raw materials priced in dollars, so the stronger greenback squeezes margins. Their trade deficit widened to over 77 billion dollars in May — that's a twenty-plus billion dollar swing from the prior month. Luna: Ouch. And that brings us to the third bucket — frontier markets and heavily indebted economies. The ones that can't defend their currencies and have debt payments coming due in dollars. Lucas: Yeah. Countries like Kenya, Pakistan, even Egypt — they're feeling the most pain. Their central banks have to raise rates to defend the currency, which crushes domestic growth. And the cost of servicing dollar-denominated debt just keeps climbing. The IMF has been stepping in with programs, but the conditionality is harsh. Luna: It's almost like the strong dollar is acting as a sorting mechanism — it's exposing which economies have buffers and which don't. Lucas: That's exactly the right framing. And I want to be honest about something here. Producing a daily show that digs into these distinctions — China versus Brazil versus Kenya — it's not cheap. We don't run ads, we don't have sponsors. What keeps this going is a small group of listeners who chip in through buy me a coffee dot com slash fexingo. It's not a big ask, but it's real. If walking through the global economy with us has made something click, that link is there. And we're grateful to everyone who's already part of it. Luna: Yeah, totally. It's how we stay independent and keep the focus on what actually matters for investors. No ad reads, no fluff. Just the data and the context. Lucas: So coming back to the divergence — one thing that stands out is how different the China story looks compared to, say, South Korea. The EWY, the Korea ETF, is down over three percent in five days. That's a semiconductor-driven export economy getting hit by both dollar strength and a global chip demand question mark. Luna: And yet SK Hynix just had a massive Nasdaq debut — chairman said demand is enormous. So the chip story isn't uniform either. Lucas: Right. SK Hynix rose 13 percent in its first day of trading in the US. But the broader Korean market is struggling because of currency and geopolitical risk. So even within one sector, the strong dollar is creating winners and losers. Luna: What about Taiwan? The EWT is down one percent. Semiconductors are their bread and butter, but they're also a pretty open economy with a lot of dollar exposure. Lucas: Taiwan is actually an interesting middle case. Their central bank has been intervening to keep the currency competitive, but they have massive foreign reserves — over 550 billion dollars. So they have more ammunition than most. But the pressure is still there. Luna: So for an EM investor today, the old playbook of 'buy EM when the dollar is weak, sell when it's strong' — that's just not enough anymore. Lucas: Not even close. You have to look at the specific country's trade balance, reserve position, debt structure, and even what commodities they export or import. Brazil benefits from a weak real because they sell soy and iron ore. India suffers because they buy oil. China is a hybrid — they manufacture everything, so a weaker yuan helps exports but hurts their purchasing power for raw materials. Luna: And then there's the frontier tier where the dollar strength is basically a slow-motion debt crisis. Kenya's shilling has lost something like 20 percent against the dollar over the past year. Their Eurobond yields are in distressed territory. Lucas: Yeah. And that's where the human impact shows up fastest. When the currency collapses, imported inflation spikes — food, fuel, medicine. It's not just a portfolio problem. It's a real-economy problem. Luna: So for someone listening who wants to position their portfolio for this environment, what's the practical takeaway? Lucas: I'd say three things. One, don't buy an EM ETF and think you're diversified in the way you used to be. The dispersion inside EEM or VWO is enormous right now. Two, pay attention to which countries are commodity exporters versus importers — that's a huge differentiator. And three, look at local currency bond yields. If a country is hiking rates to defend the currency, the carry might look tempting, but the currency risk could wipe out that yield in a month. Luna: It's a stock-picker's market, even at the country level. Lucas: Exactly. And the data we have as of this week — with the dollar index still above 120, China's equities rallying on stimulus, Brazil's market up, Korea's down — it all reinforces that you can't just say 'I'm bullish EM' or 'bearish EM'. You have to pick your spots. Luna: And keep an eye on the Fed, because that's the ultimate driver of the dollar. If rate cuts come sooner than expected, the whole EM calculus shifts again. Lucas: That's the big unknown for the second half of 2026. If the dollar starts to weaken, the most beaten-down frontier markets might see a relief rally. But if it stays strong, the divergence we're seeing now could get even wider. Luna: Either way, it's a fascinating time to be watching these markets. Lucas: Absolutely. And we'll keep tracking it every day here.