A Stronger USD and Emerging Markets

The second quarter of 2018 has brought us a sudden spike in the value of the U.S. dollar, and just as its dip in the first quarter set people ablaze in both shock and excitement, so its rise in the second quarter summoned a similar response from the masses. But will the spike continue? While some investors and financial experts are sweating in their seats, not everyone is convinced that this sudden rise in value will deliver any lasting adverse effects to the world’s emerging markets, and consequently the U.S.

The Dollar in 2018

In the first half of the year, the index tracked the dollar against many world currencies on a trade-weighted basis. The USD fell to its lowest value since December 2014, coming in at 0.8 percent to 89.153. The euro, on the other hand, advanced to a three-year high of $1.2415 per euro, according to data recorded by Reuters. Japan’s currency also took a dive when it dropped to a four-month low of 108.97 Japanese yen.

Indeed, it was a skittish time for a number of global currencies. But as the USD took a bit of a dive, it was interesting to witness the financial disconnect between the American layperson and the financial expert. Many view a weaker American dollar as entirely detrimental to the future of economic prosperity—but is this actually the case?

First, it’s important to understand what a rising U.S. dollar means for emerging market economies:

In short, a strong USD typically impacts emerging markets because a strong USD means the debt owed to the U.S. by the EM country actually goes up due to the currency exchange rate.

Guggenheimer Partners’ global chief investment officer Scott Minerd, had this to say about the status of the American dollar: “If the dollar slide were to accelerate, then foreign capital flows could decline rapidly, which would cause a sudden rise in interest rates which could shock markets and lead to unintended declines in risk assets like stocks which could damage growth.

The Future of the Dollar

While this is indeed true, it’s important to keep in mind that a major, continual decline of the value of the USD can hurt the U.S. economy by skyrocketing the trade deficit due to higher import costs. It could also lead foreign investors to pull out of their dealings with the U.S. in the fear that their long-term investments could be hurt by the slippery state of a sour USD.

In the end, it’s a bit of a Goldilocks issue when it comes to the value of the USD.

Only time will tell if the value of the USD will continue to rise, but it’s just too early to tell at this point. And it’s too early to make any definitive predictions at this point, too.