Line chart compares the U.S. dollar composite index vs. emerging market currencies.
Y-axis: Year-over-year (%); x-axis: 2007 – 2021.
Chart shows the U.S. Trade Weighted 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 20% 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 U.S. Trade Weighted Dollar change about -2.5% as of Q3 2021. The emerging markets currency index rose from roughly -5.8% at year-end 2019 to roughly 1.8% at the end of Q3 2021.
Sources: Bloomberg, Federal Reserve, and Wells Fargo Investment Institute. Monthly data from January 1, 2007 to September 30, 2021. 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 trade in a range in the third quarter, responding to the uncertain recovery in global trade and a relatively slow vaccine rollout.
- The continuing global recovery and firm commodity prices should continue to provide support for EM currencies into 2022, especially if the dollar softens against developed currencies as we expect.