Concerns Grow as Strong U.S. Dollar Expected to Threaten Emerging Market Bonds Under Trump’s Presidency

A recent report reveals growing concerns among investors about the strengthening U.S. dollar under Donald Trump’s incoming administration.

Many worry that this could disrupt returns from emerging market bonds, as the stronger dollar may trigger capital outflows. Developed countries, with their prolonged periods of high interest rates, have already attracted significant capital that would have otherwise flowed into emerging markets.

According to JPMorgan, a recent $3.2 billion net outflow from emerging market bonds in early November highlights the growing unease. So far in 2024, outflows from these markets have reached $20 billion, which, although lower than in previous years, still signals ongoing pressure.

The strength of the U.S. dollar has been largely driven by Trump’s policies, including tax cuts and regulatory rollbacks, which have bolstered investor confidence in U.S. assets. However, the potential for rising inflation could further strengthen the dollar and push U.S. Treasury yields higher, exacerbating the strain on foreign currencies.

The Brazilian Real, South African Rand, and Mexican Peso have already weakened significantly, while the Euro recently dropped to a two-year low against the dollar amid political instability in Europe.

Despite Trump’s historical stance advocating for a weaker dollar to enhance the U.S.’s global competitiveness, current market conditions may work against his goals. The ongoing strength of the dollar suggests that achieving a weaker currency may be more challenging than anticipated, especially with the Federal Reserve’s ongoing rate cuts, which continue to attract global investors to U.S. assets.

This dynamic could lead to a prolonged period of dollar dominance, putting emerging markets at a disadvantage as their currencies struggle to keep pace.