Is the U.S. Dollar Poised to Wreak Havoc on Emerging Markets?

Gold has been a thorn in the side of the U.S. dollar, but is the greenback ready to bounce back? If so, that could wreak havoc in an emerging markets (EM) sector that was already reeling from the coronavirus pandemic.

However, the tide could be turning for the vaunted greenback. With gold rallying since the coronavirus pandemic sell-offs in March, investors are continuing to pile into the precious metal as a safe haven.

“Is the decline of the dollar over? The U.S. currency has been falling steadily ever since the world exited the initial stage of the Covid-19 crisis,” a Bloomberg report noted. “It has done so in line with the spectacular decline in real yields. This makes perfect sense. With lower yields, there is lower ‘carry’ to be earned by parking in the dollar, so the currency would be expected to weaken.”

The strength of EM equities is typically tied to their local currencies. As such, a weaker dollar is ideal for a scenario where EM can thrive.

“A weaker dollar is generally regarded as a desirable for a number of reasons,” the report added. “A strong dollar tends to mean that money has gone into the U.S. seeking a haven, so the slide of the last few months shows a return of risk appetite, even as the virus remains unbeaten. Also, a strong dollar causes problems for emerging markets. The depreciation of the last few months should have relieved pressure on a number that had taken on too much dollar-denominated debt.”

An Emerging Opportunity?

Now, as global economies look to reopen, emerging markets are still a good opportunity to capture diversification and growth as a value-tilted option, but the right strategy that highlights due diligence is a must—enter the Goldman Sachs ActiveBeta Emerging Markets Equity ETF (GEM).

GEM seeks to provide investment results that closely correspond, before fees and expenses, to the performance of the Goldman Sachs ActiveBeta® Emerging Markets Equity Index. The fund invests at least 80% of its assets (exclusive of collateral held from securities lending) in securities included in its underlying index, in depositary receipts representing securities included in its underlying index and in underlying stocks in respect of depositary receipts included in its underlying index.

The index is designed to deliver exposure to equity securities of emerging market issuers. In order to obtain the highest quality equity exposure, GEM aims to acquire stocks based on four well-established attributes of performance: good value, strong momentum, high quality, and low volatility.

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