March 07, 2023
Emerging markets (EM) equity returns – as measured by the MSCI Emerging Markets Index – are inversely correlated with the US dollar. In
the chart, as one line zigs, the other tends to zag. As such, a declining dollar historically has led to positive
returns for EM equities over time. Many market pundits believe a US economic slowdown and the eventual end of the US
Federal Reserve’s tightening cycle could continue to weigh on the currently strong US dollar.
Emerging markets equities are inversely correlated with US dollar
MSCI Emerging Markets Index compared to Trade Weighted US Dollar Index (12/31/2006 – 1/31/2023)
Source: YCharts. As of 1/31/23
What this means for investors
A weakening US dollar could provide a tailwind for EM investors. Additionally, EM equities have historically been less efficient than developed markets equities, making EM an attractive asset class for active management.