Today Ashwini Gujral was saying about the Dollar index going up and it’s effect on emerging markets, i want to know why and how , @nithin sir can you help
Everything is simple terms.
Means dollar is strengthening, it is measured against a basket of other advanced currencies.
As most of the trade /financing happens in USD, strengthening of usd will make cost of servicing debt of these EM more costly and hence may make them most vulnerable to global shocks.
Also strengthening of usd may lead to increase in commodity prices which can put more burden on countries importing them.
Strengthening of USD means weakening of other currencies, so FIIs would not like to invest in equities where they may have negative returns irrespective of local market performance. Historically EM equities and dollar has negative correlation.
So, he mean as USD is strengthening, it may have negative effect on all EM and FIIs may sell eq and leave the country. This is according to theory, but the reality can depend on various other external factors, all EMs may not have the same kind of negative impact for strengthening of USD all the times.
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Can we trade in dollar index ?