Will a Gaining Dollar Hurt Emerging Markets?

With the backdrop of a still-struggling Eurozone economy, turmoil in Ukraine, and midterm elections on the horizon, Summer 2014 has seen the Dollar quietly appreciating against other world currencies. Conventional wisdom dictates that a strong Dollar creates a drag on exports, slows foreign investment, and exerts downward pressure on GDP. Conversely, a strong Dollar can be a boon to emerging market economies – especially those courting US consumers. Given IMF forecasts of a sustained US recovery coupled with sluggish economies around the globe, how should US investors react?

It has been easy in recent weeks to get carried away with big emerging market (EM) currency movements. A range of them – including the Russian rouble, Turkish lira, Polish zloty, South African rand and Brazilian real – have hit their lowest point this year against the US dollar.

But this is mostly about the dollar’s recovery, the broader US recovery and assumptions that the US Federal Reserve is way ahead of the European Central Bank (ECB) in terms of policy normalisation. Indeed, the ECB seems still to be going the other way, loosening monetary policy; the euro also appears to be on a hiding to nothing.

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