Emerging market currencies mirror the U.S. dollar

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.