Capital IdeasTM

Investment insights from Capital Group

Emerging Markets
Can a weakening US dollar catalyse an emerging market decade?
Natalya Zeman
Investment Director

A weakening US dollar has historically created a positive backdrop for emerging market equities, with the two asset classes inversely correlated, and a sharp decline in the dollar over recent months has led many to claim its decade-long bull run may be coming to an end. 

Inverse correlation between EM equities and USD

Six-month moving average: EM equities relative to developed market equities (LHS) vs. US Dollar Index (RHS)

Inverse correlation between em equities and usd

Data to 30 April 2023. Source: Capital Group
MSCI EM: MSCI Emerging Markets Index. MSCI World: MSCI World Index

If we look back at history, a strong US dollar has been associated with increased debt risk for emerging markets, slowing global growth and trade troubles. A strong dollar is also associated with ‘flight to safety’ tendencies as investors have traditionally flocked to the currency during periods of uncertainty due to its liquidity, reserve status, track record of economic and political stability, transparency, and rule of law. 

As we look ahead, however, growing evidence suggests cyclical US dollar weakening may be on the horizon. Structurally, meanwhile, after 15 years of US economic and US dollar leadership, the relative attractiveness of the US versus emerging markets could be narrowing.

Against this backdrop, Investment Director Natalya Zeman looks at whether the right drivers are in place to spark a fresh run for emerging market equities.

Natalya Zeman is an equity investment director at Capital Group. She has 10 years of industry experience and has been with Capital for seven years. Prior to joining Capital, Natalya worked in Beijing and Hong Kong where she set up and ran her own company. She holds a bachelor's degree from the University of Oxford and is based in London.

Past results are not a guarantee of future results. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.

Capital Group manages equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.