The US dollar has been a headwind for emerging markets for much of the past decade. As it strengthens, the cost of borrowing in hard currency rises, capital tends to flow back to US assets, and local currencies come under pressure. Signs of slowing inflation in the US, combined with softer economic data and shifting interest rate expectations, suggest the dollar’s momentum is weakening.
This matters for emerging markets. Many of these economies moved early to raise interest rates, well ahead of the Federal Reserve. That gave them a stronger footing to deal with inflation and currency volatility, and now leaves several with positive real interest rates and relatively stable financial systems. As the Fed signals a pause or even a pivot in policy, the rate differentials could start to favour countries that tightened early and are now in a position to attract yield-seeking capital.
Currencies are at the centre of this shift. A weaker dollar often allows emerging market currencies to stabilise or strengthen, reducing the cost of imported goods and improving external balances. In turn, this supports domestic consumption and lowers inflationary pressure.
Fidelity Emerging Markets Limited (LON:FEML) is an investment trust that aims to achieve long-term capital growth from an actively managed portfolio made up primarily of securities and financial instruments providing exposure to emerging markets companies, both listed and unlisted.
