EMs vs the dollar: History points to new sell-off for emerging markets

Emerging markets still sensitive to US policy and currency moves

Emerging markets could face a sustained period of weakness akin to falls seen during last year's "taper tantrum" if the dollar's recent bout of strength continues.

The US greenback and emerging markets have been inversely correlated for decades and, although this correlation has fallen in recent years, managers believe a stronger US dollar will hold back emerging markets. While the scale of the divergence between the US dollar and emerging markets seems to have lessened in recent years (see graph), they still remain vulnerable to bouts of dollar strength, as witnessed last summer after the US Federal Reserve hinted at tightening its monetary policy for the first time since the financial crisis. Since then, emerging markets have enjoyed a robust ...