Line chart compares the U.S. dollar composite index vs. emerging market currencies.
Y-axis: Year-over-year (%); X-axis: 2007-2022.
Chart shows the U.S. Fed Trade Weighted Nominal Broad Dollar Index vs. the J.P. Morgan Emerging Markets Currency Index, with the emerging markets currency index a near-mirror image of the trade weighted dollar index. For example, when the dollar index declines more than 10% in 2007/2008, the emerging markets index rises roughly 10% during the same period. Other examples:
- In 2009, the dollar index rises nearly 20% while the emerging markets index falls below -20%.
- In 2010, the emerging markets index rises above 14% while the dollar index falls below -10%.
- In 2015, the dollar index rises nearly 16% while the emerging markets index falls more than -20%.
The 2008/2009 recession is shown on the chart, with the emerging markets index declining sharply while the dollar index rises sharply in 2009, as indicated above. The February 2020 recession is also shown, with the broad dollar index rising more than 7% and the emerging markets index down more than 14%. As of September 2022, the dollar index had risen to 10.8% while the emerging markets currency index fell from roughly 6.8% in April 2021 to roughly -11.4%.
Sources: Bloomberg, Federal Reserve, and Wells Fargo Investment Institute. Monthly data from January 1, 2007 to September 30, 2022. Shaded areas represent periods of a U.S. economic recession. The U.S. Fed Trade Weighted Nominal Broad Dollar Index is a weighted average of the foreign exchange value of the U.S. dollar against the currencies of a broad group of major U.S. trading partners. The J.P. Morgan Emerging Market Currency Index tracks the performance of emerging market currencies relative to the U.S. dollar. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results.
Foreign investing involves risks typically not associated with investing domestically, including currency, transaction, volatility and political and regulatory uncertainty. These risks are heightened in emerging markets. Currency risk is the risk that foreign currencies will decline in value relative to that of the U.S. dollar. Exchange rate movements between the U.S. dollar and foreign currencies may cause the value of an investment to decline.
Key Takeaways
- Emerging market (EM) currencies continued to struggle, damaged by lockdowns and economic slowdown in China, as well by fears of global recession sparked by the energy crisis. Latin American commodity exporters held up better than most, but few EM currencies could oppose the stronger dollar trend, especially given the renewed slide in the yuan.
- In the context of higher energy prices and a global economic slowdown, and with the dollar gaining against developed market currencies, we expect pressure on most EM foreign exchange rates to continue in 2022.