King Dollar has lost some of the polish from its crown. What promised to be a year of strength for the US economy, driven by rising interest rates and Trump trades, has gone off the boil. Emerging markets are grateful. They are big holders of foreign exchange denominated debt, and a rising dollar requires more funds for non-US borrowers to service dollar debts.
So dollar weakness helps. But there are also signs that emerging markets are less vulnerable to the perils of a rising US dollar. EM economies look in better shape, helped by stable commodity prices and stronger anti inflation policies. Greater use of local currency debt markets, especially by foreign companies, makes emerging economies less reliant on external financing to fund the current account deficits.
All well and good, but overall, EM debt burden remains high, while the dollar won’t be held down for too long. A start in the unwinding of QE will reduce the amount of dollars around the world. US stocks continue to be well bought. And the US economy tends to do better in the second half of the year. At that point, foreigners could start deserting local EM currency debt markets. But even if King Dollar comes back, emerging markets may feel less beholden to it.