Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / How EMs Defy the Strong Dollar in June 2026
Transcript
- Lucas: So the US dollar hit a 20-year high this week, the trade-weighted index at 120.1 as of June 5th. Historically, that crushes emerging markets—capital flight, currency crises, the works. But look at this: EEM, the big EM ETF, is up 3.2 percent in the past five days. EWZ, Brazil, up 4.2 percent. EWY, South Korea, jumped 6.4 percent. What gives? Luna: It's like the old EM playbook flipped. I mean, a strong dollar usually means pain for these markets. Are we seeing a decoupling, or is this just a temporary relief rally? Lucas: I think there's something structural happening. A big catalyst is the Iran peace deal—the headlines this morning are all about that agreement to end the Mideast war. Oil prices are expected to drop, and that's a massive tailwind for oil-importing EMs like India, Turkey, and South Korea. Japan's Nikkei surged 5 percent overnight. Luna: Right, lower oil costs improve trade balances. India's current account deficit has been a worry, so that could ease pressure on the rupee. Lucas: Exactly. But there's another layer. EM central banks have been preparing for this dollar strength. They've been buying gold at record pace—we did a whole episode on that. And many, like Brazil and South Korea, raised rates aggressively in 2022–2024. So their currencies aren't as vulnerable as they used to be. Luna: The yuan has been remarkably stable too. At 6.77 per dollar, it's barely budged. Compare that to the yen at 160.3 per dollar, which is getting crushed. China seems to be managing its currency tightly to avoid capital flight. Lucas: And that's key, because China is the biggest component of most EM indexes. FXI, the China large-cap ETF, is up 1.8 percent this week. But within China, there's divergence. Alibaba is down 5.2 percent in five days, while Baidu is only down 2.8 percent. The regulatory overhang is still there. Luna: So we have this odd picture: the dollar is strong, but EM equities are rallying. Is it all about oil and central bank credibility, or is there a 'risk-on' mood from the Iran deal lifting everything? Lucas: I think it's both—but the oil story is more durable. Let's look at South Korea, EWY up 6.4 percent. Korea is a net oil importer, and its export machine has been stalling—we covered that in episode 33. Lower oil costs directly improve their terms of trade. Plus, the won has weakened, which helps exporters. Luna: But the won weakening is also a risk. If the dollar keeps climbing, Korean companies with dollar-denominated debt could get squeezed. So is this rally sustainable? Lucas: That's the billion-dollar question. Let's look at Brazil, EWZ up 4.2 percent. Brazil is actually a major oil exporter, so you'd think lower oil prices would hurt. But they also export commodities like iron ore and soy, and the weaker real helps. Plus, their central bank has been hawkish, with rates above 10 percent. That attracts carry trade. Luna: So it's not a uniform EM story. Brazil benefits from high rates and commodity exports; Korea benefits from lower oil and a weak won; China is its own beast. Lucas: Exactly. And that's why the old correlation between a strong dollar and falling EM stocks is breaking. It's not 2013 anymore, where every EM gets hammered in a 'taper tantrum'. Luna: You mentioned the carry trade. With US rates still high, money is flowing into EM bonds with high yields. That's part of the capital inflow we're seeing, right? Lucas: Yeah, EM bond ETFs have seen inflows this week. But there's a risk: if the dollar strengthens further, those carry trades could unwind fast. The trade-weighted dollar index at 120.1 is already elevated. A move to 125 could trigger a reversal. Luna: So the Iran deal gives a temporary boost, but the structural dollar strength is still a headwind. What about India? INDA is up 2.4 percent this week. Lucas: India is interesting. They're a net oil importer, so lower oil is a big plus. But they also have a current account deficit and inflation concerns. The Reserve Bank of India has been intervening to support the rupee. If oil stays lower, that gives them breathing room. Luna: But India's digital infrastructure story—we covered that in episode 48—might be attracting longer-term capital too. That's more resilient to currency swings. Lucas: Right. And that's the bigger picture: some EMs are becoming less commodity-dependent and more diversified. Mexico, for instance, is benefiting from nearshoring. EWW, the Mexico ETF, is up 4.8 percent this week. The us china trade war and the 'friendshoring' trend are structural shifts. Luna: So the playbook has changed. Investors can't just short all EM when the dollar rallies. They have to pick and choose. Lucas: And that's where the divergence within EM becomes critical. Look at the performance of individual stocks: Alibaba down 5 percent, JD flat, PDD down a bit. Chinese tech is still under pressure from regulatory and geopolitical risks. Meanwhile, Korean and Mexican stocks are surging. Luna: So for a listener trying to navigate this, what's the takeaway? Should they be overweight EMs right now? Lucas: I think the key is to be selective. The broad EM rally this week might have legs if oil stays low and the Iran deal holds. But if the dollar keeps climbing, the vulnerable spots are high-debt, commodity-importing EMs like Turkey or Pakistan. The stronger EMs—Korea, Mexico, Brazil, India—have buffers. Luna: And speaking of buffers, EM central banks have built up a lot of credibility. They didn't panic in 2022. They raised rates early, they bought gold, they intervened in FX. That's paying off now. Lucas: Yeah, that gold buying we talked about in episode 50 is a real safety net. Central banks added over a thousand tons last year. It gives them ammunition to defend their currencies without depleting dollar reserves. Luna: So the narrative that a strong dollar always crushes EM is outdated. The data from this week proves it. Lucas: Exactly. And I think if you're looking for a concrete takeaway, watch the yuan. If China lets it weaken below 7 per dollar, that could signal a shift in policy and spark a broader EM selloff. But for now, at 6.77, it's stable. Luna: Good point. The yuan stability is anchoring a lot of the region. If it moves, everything changes. Lucas: One thing that's really useful about following these markets daily is how patterns emerge. If today's episode helped make sense of that, it's exactly what we're here for. Luna: Totally. And the way these episodes stay ad-free and independent is through listener support. If you get value from it, you can help keep it going at buy me a coffee dot com slash fexingo. Lucas: So back to that divergence—Mexico's nearshoring boom is a great example of a structural trend that's not going away. EWW is up nearly 5 percent this week, and that's not just oil or the Iran deal. It's companies moving supply chains out of China. Luna: And that's a multi-year trend. So even if the dollar rally pauses, Mexico and other nearshoring beneficiaries have their own momentum. Lucas: Right. So the bottom line: don't paint all EM with one brush. The strong dollar is real, but the winners are those with sound monetary policy, low oil dependence, and structural growth stories like nearshoring or digital infrastructure. Luna: And keep an eye on that yuan. It's the linchpin. Lucas: Good note to end on. For the Emerging Markets Podcast, I'm Lucas. Luna: And I'm Luna. See you next time.