Why strengthening US dollar could signal problems for EMD

ON BONDS

While many of the oft-quoted benefits of emerging markets are valid, it is important to remain open to the risks the asset class faces.

The strengthening US dollar is one area with the potential to cause problems. This is less because of excessive external debt and more because a popular currency trade in recent years has been to sell the US dollar in favour of emerging market currencies, specifically Asian ones.  The most likely cause of a stronger US dollar would probably be a worsening of the eurozone debt crisis. What would the likely effect of this be on emerging market local currency debt? Until a few months ago, it had appeared remarkably immune to global risk aversion but this is suddenly starting to change, with...