Latest / International Business with Fexingo: Global Trade, Cross-Border Deals, and Multinational Operations / The Strong Dollar Is Squeezing Emerging Markets Again
Transcript
- Lucas: So the US dollar index hit 119.3 last week. That's not just a number on a screen—it's the strongest the dollar has been relative to a basket of major currencies in over twenty years. And if you're an emerging market, that number is basically a headache in numerical form. Luna: Right, because when the dollar strengthens, everything denominated in dollars gets more expensive for everyone else. Debt service, commodity imports, you name it. Lucas: Exactly. And we're already seeing the fallout. Look at India—the rupee has been sliding, and foreign investors pulled roughly twelve billion dollars out of Indian equities in the first four months of this year. That's a big reversal from the inflows we saw through most of 2024 and 2025. Luna: Twelve billion is significant. But is this purely about the dollar, or is there something specific to India that's spooking investors? Lucas: It's mostly the dollar, but India does have its own vulnerabilities. Their current account deficit widened to about two and a half percent of GDP last quarter. When the dollar strengthens, that deficit becomes costlier to finance because more of that borrowing is in dollars. Plus, oil is priced in dollars, and India imports over eighty percent of its crude. So a stronger dollar means higher fuel costs, which feeds into inflation. Luna: So the Reserve Bank of India is caught between defending the currency and supporting growth. They've hiked rates a couple of times this year already, haven't they? Lucas: They have. The repo rate is now at six point seven five percent, up fifty basis points from where it started the year. And the market is pricing in at least one more hike. But here's the tension: if they hike too much, they risk slowing down an economy that's still growing at a respectable six and a half percent. If they don't hike enough, the rupee keeps sliding and import costs keep rising. Luna: It's a classic emerging market squeeze. And it's not just India. We're seeing similar pressure in Indonesia, Brazil, even parts of Southeast Asia. Lucas: Brazil's real has actually held up relatively well—partly because commodity prices are still strong, and Brazil is a big exporter. But other places are struggling. The Chinese yuan has weakened to six point eight one per dollar, and that's with the People's Bank actively managing the exchange rate. Without that intervention, the yuan would probably be even weaker. Luna: And a weaker yuan has knock-on effects for the rest of Asia. If China lets its currency slide to boost exports, then countries like Vietnam, Thailand, South Korea all have to decide whether to devalue competitively or watch their export competitiveness erode. Lucas: That's the classic competitive devaluation risk. But so far, most central banks are trying to manage the slide rather than trigger a race to the bottom. The bigger concern is the debt angle. Since the global financial crisis, emerging market corporate debt has ballooned to over four trillion dollars, a lot of it in dollars. When the dollar strengthens, the servicing cost of that debt goes up automatically—even if interest rates don't change. Luna: Right—because you earn revenue in local currency but have to pay back in dollars. So a ten percent dollar rally effectively adds ten percent to your debt burden. Lucas: Exactly. And that's why we're seeing higher default risk in places like Pakistan, Egypt, and even some frontier markets in Africa. The IMF has been busy. But it's not all doom and gloom. Some emerging markets have built up larger foreign exchange reserves and have more flexible exchange rate regimes than they did in the 1990s or even during the 2013 taper tantrum. Luna: The taper tantrum is a good analogy. Back then, the Fed merely hinted at tapering QE, and emerging markets sold off hard. This time, the dollar rally is being driven by Fed rate hikes that are actually happening, plus a relatively strong US economy. Lucas: Right. And the Fed isn't done yet. The market is pricing in another quarter-point hike in June, and maybe one more after that. So the dollar could stay strong for a while. But there's a flip side: a strong dollar also hurts US exports. The US trade deficit widened to over sixty billion dollars in March, partly because a strong dollar makes American goods more expensive abroad. Luna: So the stronger dollar is a double-edged sword. It helps US consumers by keeping import prices lower, but it hurts US manufacturers and farmers who sell overseas. And it creates financial instability in emerging markets. Lucas: Exactly. And that instability can eventually circle back to the US. If emerging market economies slow down, they buy fewer US exports, and US multinationals that derive a big chunk of revenue from those markets see their earnings hit. We saw that dynamic play out in 2015 and 2016, when the dollar rally contributed to an earnings recession in the S&P 500. Luna: So what's the one thing listeners should watch going forward? Is it the Fed's next move, or something else? Lucas: I'd say watch the yuan. The dollar-yuan exchange rate is the most important currency pair for global trade and capital flows. If China lets the yuan weaken past seven per dollar, that could trigger a broader sell-off in emerging market currencies and assets. So far, the PBOC has been defending around six point eight, but if the dollar keeps rallying, that defense gets more expensive. Luna: And keep an eye on India's rupee too. If it breaks past eighty-five per dollar, that would be a psychological threshold that could accelerate capital outflows. Lucas: Exactly. The dollar's strength isn't just a US story—it's reshaping global trade, investment, and policy decisions from Brasília to Bangkok. And for business leaders, that means re-evaluating supply chains, hedging strategies, and where to allocate capital. Luna: It's a good reminder that in international business, currency moves can be just as important as the underlying business fundamentals. Lucas: Yeah. The dollar doesn't care about your growth story. It just keeps doing its thing.