It has been some time since the US dollar (the worldâs reserve currency) has been reviewed at SIA, as much attention has shifted toward alternative stores of value such as gold, which has surged against the dollar. Despite concerns about declining purchasing power, the dollar has actually demonstrated remarkable strength, outperforming many other major currencies. This resilience reflects not merely cyclical responses to higher interest rates, but deeper structural forces: monetary tightening by the Federal Reserve, the relative outperformance of the US economy, and recurring bouts of global uncertainty have all driven capital toward dollar-denominated assets. The result is a persistently elevated dollar that underscores its central role in the global financial system and magnifies the spillover effects of US policy on economies worldwide.
The US Dollarâs Enduring Strength
The consequences of this strength are particularly pronounced for emerging markets; because these economies rely heavily on dollar-denominated borrowing, trade, and capital inflows, a rising dollar immediately increases the local-currency burden of debt and raises borrowing costs. Capital is pulled toward US assets during periods of higher yields, especially amid wars or geopolitical uncertainty, typically triggering outflows from emerging markets and pressuring home currencies. These financial effects quickly spill into the real economy: imports such as energy and food become more expensive, inflation rises, and policymakers are often forced into defensive interest-rate hikes, even when domestic conditions would suggest looser policy. In this way, a strong dollar effectively exports US monetary tightening abroad, compressing policy space and amplifying volatility far beyond US borders.
On the eve of Japanese interest rate hikes, this relationship is particularly relevant. The attached long-term USD/CAD chart illustrates the persistently high level of the dollar, currently at 1.3784. Of note is the highlighted resistance at 1.4609âa level broken during 1998â2002 that coincided with the Asian Financial Crisis, which later spilled over into Russia and contributed to Yeltsinâs resignation at the end of 1999, paving the way for Vladimir Putin. While the chart shows support at 1.3556 and 1.3091, the more interesting feature is the developing price discovery triangle, which, once resolved, may offer critical insights into intermarket relationships and potential directions for global markets and US equities.
Conditions for an Emerging Market Recovery
Emerging markets have struggled to keep pace with developed economies over the past 15 years, and the comparison chart of an emerging markets proxy versus the S&P 500 clearly illustrates this extended period of underperformance. Highlighted periods where emerging markets outperformed coincide with pullbacks in the US dollar, and even minor mean-reversion rallies correspond with periods of dollar weakness. The combination of the USD price discovery triangle and the long-term trendline reversal on the EM vs. S&P chart may signal the next pulse of global markets.
Historically, sustained emerging market rallies have required several converging forces: a return of global risk appetite (low global valuations), improving commodity prices (low crude prices), domestic reforms that strengthen fiscal and financial resilience, and, most importantly, a plateau or weakening of the US dollar. Given that the USD has experienced a particularly brutal year-to-date against almost all other currencies, this critical factor may be beginning to fall into place, potentially setting the stage for renewed emerging-market strength and broader intermarket opportunities.
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