What this chart shows
This chart portrays the inverse relationship between the MSCI Emerging Markets Index on the left axis, and the US Dollar Index on the right axis, showcasing how a weakening dollar tends to strengthen the appeal of emerging markets (EM) and vice versa. According to the Institute of International Finance, EM flows rose to $98.8bn in January, the strongest January on record and the second highest month in the last two decades. In contrast, the dollar has suffered a four month decline amid rising levels of US federal debt, loosening monetary conditions, and a moderation in US growth prospects.
Why this is important
EM assets have likely benefited from a round of profit-taking, as the strong outperformance of US equity positions has stalled, prompting capital to be reallocated into the previously underappreciated EM space. Index composition also had a part to play, with heavyweights such as TSMC, Samsung Electronics and Tencent driving returns through their exposure to the AI theme.
A diminishing US dollar environment usually boosts EM because their dollar denominated debt becomes cheaper to repay and global financial conditions tend to ease, often supporting higher commodity export revenues. At the same time, when EM currencies strengthen against the dollar, foreign investors can benefit twice (once from the asset’s return itself and then again from currency appreciation when converting gains back into hard currency), making EM assets more attractive. Under Trump’s administration the dollar may well continue to grind lower through 2026, with downturns historically lasting more than just a few months. The dollar’s share in total allocated international reserves has dropped to levels not seen since the mid-1990s, hinting at a longer-term trend away from dollar dominance and towards one of diversification, with central banks holding increased shares of other currencies (e.g. euro, yen) and gold (catalysing the recent rally).
The outlook for EM certainly remains attractive. Forecasts of deeper easing cycles leave emerging economies poised to benefit from large US Tech capital expenditures, in turn driving up their earnings growth estimates. Of course there are associated risks. With emerging markets often described as a leverage play on global growth, a large correction in the developed world (perhaps from stretched US valuations) or a significant reversal in the dollar would be unfavourable.
The EM investment landscape is broad, and active managers will be finding plenty of opportunities in the upcoming months across a range of countries and sectors to enhance returns above that of the indices.
The dominant financial theme was a sharp escalation in global trade tensions driven by new US tariffs, which disrupted global supply chains, weakened trade outlooks, and reshaped relative competitiveness between major economies.
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The US Supreme Court struck down key Trump tariff measures, ruling emergency powers (IEEPA), did not authorise sweeping tariffs, triggering global trade and legal uncertainty.
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Trump quickly imposed a replacement temporary 15% global tariff under different legislation, escalating trade tensions and raising the effective US tariff rate significantly.
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Markets reacted strongly to tariff legal rulings, with equities rising and the dollar weakening as investors recalibrated trade expectations.
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The US significantly increased military deployments in the Middle East amid rising tensions and potential preparations for military action against Iran with Trump told advisers if diplomacy or a limited US strike fails to push Iran to scrap its nuclear program, he will consider a bigger attack.
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UK exporters face major uncertainty from US tariff hikes, which threaten tens of thousands of firms not covered by preferential bilateral trade agreements.
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The UK government is negotiating with the US to preserve favourable trade terms and limit damage to British businesses.
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The UK refused to allow the United States to use British military bases for potential strikes against Iran, highlighting divisions among Western allies and UK reluctance to escalate militarily.
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Labour faces rising internal instability as policy reversals, declining support, and upcoming by-election risks intensify political pressure on Prime Minister Keir Starmer and increase speculation about potential leadership challenges.
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EU lawmakers called to delay ratification of the EU-US trade deal amid uncertainty caused by US tariff policy shifts
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ECB kept interest rates steady amid low inflation and economic stabilisation, with inflation expected to remain below target in 2026.
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The European Commission is considering changes to WTO trade rules to address rising Chinese exports and protect European industries.
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Eurozone growth improved modestly due to manufacturing recovery, boosting regional economic momentum.
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China is approaching renewed US trade tensions cautiously while positioning diplomatically to preserve trade stability and stands to benefit from revised US tariffs that reduce its relative tariff disadvantage versus key US allies. China reopens on the 24th after being closed for Lunar New Year for over a week.
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The IMF and other global institutions have urged China to shift towards domestic consumption to support more sustainable, balanced long-term economic growth.
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Japan is planning substantial investment in US energy and critical minerals, strengthening strategic economic ties and improving supply chain security between the two countries.
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Ukraine has achieved notable battlefield gains against Russian forces, recapturing more than 200 square kilometres of occupied territory in one of its most significant advances in over two years, signalling renewed operational momentum.
