Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / How Emerging Markets Are Decoupling From the US Dollar
Transcript
- Lucas: So the dollar index is sitting around 119.7, basically flat for the month, and yet emerging market equities have had a surprisingly good week. EEM is up 2 percent over five days, VWO up 2.3 percent. That's not what you'd expect if you've been reading the usual 'strong dollar is bad for EM' playbook. Luna: Right, I mean, we did a whole episode on that a few months ago. So what's changed? Is the dollar just not as dominant as we thought, or are emerging markets finally learning to shrug it off? Lucas: I think it's a bit of both, but the more interesting story is that a lot of emerging markets are genuinely decoupling from the dollar in a way we haven't seen before. You've got India's market barely moving even as the global selloff hit, Taiwan up over 5 percent in just five days, Korea up 3.6 percent. These aren't just resilient — they're outperforming. Luna: And before we get into the why — you know, if you're enjoying these conversations about how the global economy actually works, and you want to help keep the show ad-free, you can support us. It's buy me a coffee dot com slash fexingo. No pressure, just helps us keep doing what we do. Lucas: Yeah, we really appreciate anyone who does that. It's what keeps this going. But back to the decoupling — I think the key is that these countries have built domestic demand engines and regional trade links that are less reliant on US consumers and the dollar cycle. Take India: its market is up 0.4 percent over the week, which doesn't sound like much, but compare that to Brazil, which is down 3.1 percent. Brazil is still heavily tied to commodity prices and dollar-denominated debt. Luna: So it's not all emerging markets — it's really a split. The ones that are adopting tech, building their own supply chains, they're doing well. The ones that are still exporting raw materials to the US? They're feeling the pinch. Lucas: Exactly. And the data backs that up. US exports of goods and services are up to 3.75 trillion, imports at 4.62 trillion. The trade deficit is still huge, but it's narrowing. And some of that is because emerging markets are trading more with each other. China's yuan has stayed flat against the dollar at 6.75, which is pretty stable given everything that's going on. Luna: So how much of this is the Fed? I mean, we just had a disappointing jobs report, and there's chatter about the Fed cutting rates. Does that change the picture for EM? Lucas: It does, but not in the way you'd think. A weaker dollar helps EM in the short term, but the real story is that these markets are becoming less sensitive to the Fed's every move. Taiwan's market is up 5.1 percent this week, and that's not because of the Fed — it's because of the AI supply chain. Samsung and TSMC are in demand, and that's driving the whole region. Luna: So it's about earnings, not just currency. But what about the countries that are still dollarized? Like, a lot of African and Latin American countries have debt in dollars. They're still vulnerable. Lucas: That's the key distinction. If you look at the dollar index, it's still high historically — 119.7 is up from around 95 a few years ago. So for countries with dollar-denominated debt, it's still a burden. But the countries that have done the work to reduce that exposure — they're the ones seeing the benefits now. India's central bank has been building reserves, and they've been pushing for trade in rupees. It's a slow process, but it's real. Luna: And China's yuan stable at 6.75 — that's a deliberate choice, right? They're not letting it appreciate too much because that would hurt their exports. Lucas: Exactly. They're managing it. And that's actually a form of decoupling — they're not letting the dollar dictate their currency. The yuan has been remarkably stable even as the dollar index moved. That's a sign of a more multi-polar currency world. Luna: So what does this mean for the average investor? I mean, if you're looking at EEM and VWO, should you be adding exposure now? Lucas: I'd say it's less about timing and more about selection. The broad EM ETFs are going to give you the good and the bad. But if you look at the regional ETFs — the Taiwan fund, the Korea fund — they're up because of tech. And that's not going away. The AI build-out is still in early innings. Luna: But you also have to be careful. Remember that Korea had that chip rout earlier this year. There's still volatility in tech-driven markets. Lucas: Sure, but the trend is your friend here. The countries that are winning are the ones that are investing in tech and domestic consumption. India's market is up because of a structural story — demographics, digitalization, manufacturing. Taiwan and Korea are up because they're at the center of the AI supply chain. These are structural, not just cyclical. Luna: And what about the countries that are losing? I mean, Brazil is down 3.1 percent. Is that just oil? Or is it political? Lucas: It's a mix. Brazil's still tied to commodity prices, and with the dollar strong, that's a headwind. But also, a lot of the money that used to go to Brazil is now going to India and Southeast Asia. Investors are looking for growth, not just yield. And that's a fundamental shift. Luna: So is the dollar losing its reserve currency status? I mean, that's a big claim, but you're kind of implying it. Lucas: I'm not saying that. The dollar is still the world's reserve currency, and that's not changing anytime soon. But what is changing is that emerging markets are no longer passive victims of the dollar cycle. They have more tools — reserves, swap lines, local currency bonds — to cushion the blow. And that's a big deal. Luna: And the fact that the trade deficit is narrowing — is that part of it? I mean, the US is importing less, exporting more. That's got to affect EM. Lucas: Well, the deficit is still huge — over $73 billion in June. But the trend is toward less dependency. And that's partly because US companies are re-shoring, but also because EM companies are finding other buyers. The intra-Asia trade is growing. China is buying more from Korea and Taiwan. That's a shift. Luna: So the story is: emerging markets are becoming more self-reliant. And that's a good thing for investors who are diversified. Lucas: Exactly. I think the takeaway is that the old rule of thumb — 'when the dollar rises, sell EM' — is breaking down. You have to look at the individual country, its trade links, its debt structure, its tech adoption. The ones that have done their homework are outperforming. The ones that haven't are still stuck in the old cycle. Luna: But is there a risk that this decoupling is just a temporary phenomenon? I mean, if the dollar takes another leg up, could we see a reversal? Lucas: There's always that risk. But even if the dollar strengthens further, the structural changes are still there. India's domestic consumption isn't going away. Taiwan's position in the AI supply chain isn't going away. So I think the decoupling is more durable than people think. Luna: And what about the political angle? I mean, we have a very trade war prone US administration. Could that accelerate the decoupling? Lucas: Actually, yes. When the US slaps tariffs on China, it forces companies to move supply chains to other countries — Vietnam, India, Mexico. That actually strengthens those EM economies. So in a weird way, the trade war is helping some emerging markets diversify away from the US. Luna: So if I'm an investor, how do I play this? Do I go with the broad ETF, or do I pick countries? Lucas: Well, for most people, the broad ETF is fine. But if you want to be a little more tactical, look at countries with strong domestic demand and tech exposure. India, Taiwan, Korea, maybe Vietnam if you can find a good fund. Avoid the ones that are still commodity-dependent and dollar-indebted. Luna: That's a pretty specific playbook. And I guess the key is to watch the dollar index, but not obsess over it. Right, Lucas? Lucas: Right. Keep an eye on it, but don't let it be the only thing you look at. The days when a rising dollar automatically meant falling EM stocks are over. It's a more nuanced world now. Luna: And that's a good thing for listeners who are interested in emerging markets. It means there are opportunities beyond the usual narrative. Lucas: Definitely. And I think that's the big takeaway from this week's numbers. The decoupling is real, and it's giving investors a new way to think about EM.