As the US dollar climbs to new heights, emerging economies must navigate turbulent financial waters. This article explores the multifaceted impact of a stronger dollar and offers practical guidance for policymakers, investors, and business leaders seeking resilience and growth.

By examining data, trends, and real-world examples, we unveil both the strains inflicted by currency swings and the opportunities that prudent strategies can unlock.

Overview: Dollar Movements and Their Impact on Emerging Markets

Over the past year, the 6.88% real trade-weighted index gain for the US dollar has reverberated across global markets. Emerging economies, often carrying substantial US dollar liabilities, feel these shifts most acutely. In 2024, the J.P. Morgan EM Currency Index slid by 9% amid dollar strength, eroding asset values and dampening investor confidence.

Major currencies faced steep declines: the Mexican peso slid by 16%, while the Brazilian real plunged by 20%. These depreciations heighten the cost of servicing foreign debt and drive up prices of essential imports.

Key Challenges for Emerging Markets

As the dollar ascends, emerging markets grapple with mounting pressures that can threaten growth and stability.

• External debt burden risks: Local currencies weaken, raising the local cost to service dollar-denominated debt and increasing default probabilities.
• Currency depreciation effects: Weaker exchange rates trigger capital flight, erode investor trust, and heighten market volatility.
• Rising inflationary pressures: More expensive imports feed inflation, hurting consumers and prompting tighter domestic monetary policies.
• Trade disruption dynamics: A strong dollar can exacerbate global trade tensions, undermining export competitiveness.

Central banks often face a dilemma: hike rates to defend their currencies and stifle growth, or tolerate depreciation and domestic price spikes.

Drivers of a Rising Dollar

The dollar’s strength reflects several intertwined forces. Elevated US interest rates have produced attractive yields, drawing capital away from riskier markets. In addition, anticipated fiscal expansion and tax cuts add fuel to growth expectations and bolster the currency.

During periods of uncertainty, global investors flock to the dollar as a safe haven, reinforcing upward momentum. Collectively, these factors create a self-reinforcing cycle that challenges less liquid and smaller markets.

• Interest rate differential attraction: Higher yields in the US lure global funds.
• Safe-haven capital flows: Turbulence drives investors into dollar assets.
• US policy growth expectations: Fiscal stimulus projections and deregulation prospects boost the greenback.

Silver Linings: Periods of Dollar Softness

Even amid long-term strength, occasional dollar pullbacks offer relief and opportunities. In mid-2025, the dollar index dipped to its lowest since April, down 0.63% on June 6. This respite followed speculation of anticipated Fed rate cuts and doubts over sustained trade truce durability.

During these windows of softness, emerging markets can:

• Reduce debt service costs by paying down or refinancing dollar liabilities at lower local-currency rates.
• Boost export competitiveness as weaker local currencies make goods more affordable abroad.
• Equity market resilience and growth emerge when global risk appetite returns, benefiting stock indices from Hong Kong to Poland.

For example, Hong Kong’s Hang Seng rallied strongly, and Poland’s WIG Index rose steadily, while commodity-exporting nations like Mexico and Peru saw gains through higher commodity prices and tariff exemptions.

Divergence Among Emerging Markets

Not all emerging economies ride the same wave. Markets with lower external debt or robust foreign reserves withstand dollar surges better.

Asian markets display varied performance: Hong Kong outpaced mainland China thanks to tech-sector strength and sizable foreign investment inflows. In Central Europe, Poland’s close ties with the EU underpinned steady gains, while Latin American markets, buoyed by strong commodity sectors and favorable trade agreements, showed remarkable resilience.

This divergence underscores the importance of prudent debt management and diversified economic structures in withstanding currency shocks.

Policy Responses and Outlook

Emerging market central banks often confront a difficult trade-off between defending their currencies and preserving domestic growth. While rate hikes can stabilize exchange rates, they risk slowing credit growth and consumer spending.

According to JP Morgan forecasts, the dollar may weaken later in 2025, potentially easing pressure on emerging assets. If global growth stabilizes and trade tensions abate, EM currencies could find firmer footing, narrowing the EM–DM growth gap, which is projected at 2.5% in 2025.

China’s stabilizing data and targeted government stimulus offer a notable case study: while real estate risks and trade frictions remain, focused fiscal support has begun to temper volatility.

Investor Strategies and Practical Tips

For investors and corporate managers operating in emerging markets, proactive measures can mitigate risks and capture upside opportunities.

• Diversify currency exposure across multiple EM currencies and safe-haven assets to balance volatility.
• Use hedging instruments such as forwards, options, and cross-currency swaps to lock in costs.
• Monitor debt maturity profiles and prioritize refinancing high-cost dollar liabilities sooner.
• Stay informed on policy shifts by tracking central bank announcements and fiscal policy updates.

By aligning portfolios with these guidelines, stakeholders can achieve more stable returns and contribute to healthier local financial ecosystems.

Risks to Watch

Despite cautious optimism, several threats loom on the horizon. Unforeseen Fed tightening or renewed protectionist rhetoric could trigger fresh dollar rallies, unsettling markets once again.

Countries with high dollar-denominated debt and limited reserves—such as Turkey and Argentina—face elevated debt crisis risks. Additionally, geopolitical flashpoints and commodity price swings can amplify currency volatility, demanding vigilant risk management.

Ultimately, emerging markets that employ strategic policy responses, maintain disciplined debt practices, and adopt adaptive investment strategies stand the best chance of weathering dollar cycles and unlocking sustainable growth.

By understanding the forces at play and implementing practical measures, policymakers and investors can transform challenges into opportunities, forging a more resilient financial future for emerging economies.