Latest / International Business with Fexingo: Global Trade, Cross-Border Deals, and Multinational Operations / Why the Dollar Rally Is Crushing Emerging Markets in Mid-2026
Transcript
- Lucas: If you looked at the S&P 500 heading into this weekend, down about one and a half percent in five days, you might think it's been a rough week for markets. But then you look at emerging markets and realize that was the easy part. Luna: Yeah, I've been watching the EEM ETF. It's down over five percent this week. VWO, the broader EM fund, off about four and a half. That's a serious drawdown. Lucas: And if you drill into specific countries, it gets more dramatic. South Korea's EWY dropped nearly nine percent in just five days. Taiwan's EWT fell almost eight. Those are not small moves. Luna: So what's the common thread here? Because it's not like each country had its own bad news. This looks like a macro-driven selloff. Lucas: That's exactly it. The common thread is the dollar. The trade-weighted dollar index just hit 120.4, up from 119.4 the previous week. And when the dollar strengthens like this, it puts enormous pressure on emerging markets. Luna: Right, because a lot of EM companies and governments have dollar-denominated debt. As the greenback appreciates, that debt becomes more expensive to service in local currency terms. Lucas: Precisely. And it's not just debt servicing. A stronger dollar tends to pull capital out of EM — investors rotate back into US assets, especially if US yields are attractive. You see it in the data: the yen weakened past 161 per dollar this week, the yuan slipped to 6.77 per dollar. Luna: And that currency weakness forces EM central banks to raise rates to defend their currencies, which slows their domestic economies. It's a vicious cycle. Lucas: Right. South Korea is a great example. The KOSPI is highly correlated with global tech demand and export cycles, but it's also sensitive to capital flows. When the dollar surges, foreign investors pull out of Seoul, and the won weakens. That feeds back into inflation because Korea imports a lot of energy and food. Luna: Taiwan is similar. The Taiwan Stock Exchange is dominated by tech exporters, but the currency moves matter too. And with the Strait of Hormuz tensions escalating this week — Trump saying Iran violated the ceasefire — that adds a geopolitical risk premium to the whole region. Lucas: Exactly. Oil price uncertainty compounds the problem for net importers like Korea and Taiwan. Meanwhile, you have commodity exporters like Brazil actually doing okay. The EWZ ETF, which tracks Brazilian stocks, is up about one point six percent this week. Luna: So there's divergence within EM. Not all countries are getting hit equally. Brazil benefits from higher commodity prices and a weaker real can actually help its exporters. Lucas: That's the key nuance. The dollar rally is not a uniform EM killer. It punishes countries with high external debt, low foreign reserves, and current account deficits. It rewards countries that are net commodity exporters or have relatively closed capital accounts. Luna: Which brings us to China. The FXI, which tracks Chinese stocks listed in Hong Kong, dropped about five and a half percent this week. But China's capital controls give it some insulation from the full force of the dollar cycle. Lucas: To a degree. But China's economy is slowing, and the yuan weakening to 6.77 per dollar adds pressure. The People's Bank has to manage the trade-off between supporting growth and preventing capital flight. It's a delicate balance. Luna: I remember the taper tantrum in 2013 — Bernanke hinted at tapering QE, the dollar strengthened, and EM stocks got hammered. Is this a repeat of that? Lucas: There are parallels. Back then, the trigger was the Fed signaling tighter policy. Today, the trigger is a combination of Fed rhetoric — Trump is reportedly easing pressure on Chair Warsh, but inflation is above four percent — plus safe-haven demand from geopolitical tensions. The dollar is strengthening for multiple reasons. Luna: And the magnitude this week is reminiscent of 2013. But the EM landscape has changed since then. Countries like India and Indonesia have built up larger foreign reserves. Others like Turkey and Argentina are still fragile. Lucas: That's a good point. The fragility is uneven. If you look at the data, India's INDA ETF is down less than one percent this week. That's a stark contrast to Korea and Taiwan. India has a large domestic economy, less reliance on foreign capital, and a central bank that has been proactive in managing the rupee. Luna: So the question for investors is: do you buy the dip in the hardest-hit markets like Korea and Taiwan, or do you wait for the dollar to peak first? Lucas: Historically, trying to catch a falling knife when the dollar is still strengthening is risky. The dollar index could easily go to 125 if the Fed stays hawkish and geopolitical tensions don't ease. I'd wait for signs of stabilization in the dollar and in capital flows before stepping in. Luna: That's a measured take. And it ties into something broader: these episodes remind us that global investing isn't just about company fundamentals. The currency and macro backdrop can overwhelm stock-picking for months at a time. Lucas: Absolutely. And speaking of the macro backdrop, one thing that makes these conversations valuable is that we can step back and think about the big picture without the noise of daily ticker watching. We deliberately keep this show ad-free for that reason. Luna: Yeah, it's a conscious choice. No sponsor interruptions, no trying to sell you a financial product. Just two people trying to make sense of what's happening. Lucas: If these conversations have moved your thinking forward in some small way, listener support is what keeps that possible. The link is buy me a coffee dot com slash fexingo. No pressure, just an option if you find value here. Luna: And it genuinely helps. Okay, back to the EM selloff. So the big question is: do you see this as a correction within a longer-term bull trend for EM, or something more structural? Lucas: I think it's a correction, but the recovery might be uneven. Countries that use this period to implement reforms — like improving fiscal discipline and reducing dollar debt — will come out stronger. Those that don't could lag. Luna: And the wildcard is the dollar itself. If the trade-weighted index starts to roll over, EM could rally sharply. But that might require a shift in Fed policy or a resolution to some of the geopolitical risks. Lucas: Exactly. For now, the dollar is the story. And until we see a clear peak, caution in EM is warranted. But for patient investors, this volatility often creates entry points in quality companies at discount prices. Luna: That's a good note to end on. Thanks, Lucas. Lucas: Thanks, Luna. See you next time.