Weighing on some emerging markets, the U.S. dollar has appreciated 12% on a trade-weighted basis between June 2014 and March 2015. [EM Currency Hedged ETF Receiving Increased Interest]
“It can give rise to negative balance sheet effects that damage emerging market growth. This is especially the case where there are substantial mismatches between the dollar liabilities and assets of corporates, banks and governments in[emerging markets],” Slater added.
For instance, the drop in resource prices have pressured commodities export-oriented emerging countries – Chile is a major exporter of copper, and Malaysia’s commodity exports make up about 8% of Gross Domestic Product. However, lower commodities prices are a positive for many other emerging economies that import raw materials. [Copper Crush Crimps Chile ETF]
Additionally, diminished capital flows due to currency risks could also weigh on the emerging markets. Since investors would pull out of foreign markets if the U.S. dollar strengthens, emerging market currencies would weaken and the local central banks could tighten rates or drain banking liquidity to help stem the flows.
For more information on the developing economies, visit our emerging markets category.
Max Chen contributed to this article.