Dollar Strength and EM Implications
The DXY has rallied to 106. We examine the implications for emerging market assets and the feedback loop between dollar strength and global liquidity.
Note
The dollar has been quietly strengthening, with DXY pushing above 106 for the first time since Q4 2024. This is driven by rate differentials (the Fed is still more hawkish than ECB and BoE) and a flight-to-quality bid amid rising geopolitical uncertainty.
For EM assets, dollar strength is unambiguously negative. It tightens financial conditions, raises the real burden of dollar-denominated debt, and compresses commodity prices.
Key countries to watch: Turkey, South Africa, and Brazil all have significant external funding needs and currency vulnerability. EM local bonds look cheap on a real yield basis, but timing matters -- and the dollar trend needs to reverse before these become attractive entry points.