In focus

Emerging markets: time to be patient?

  • The US dollar downtrend bottomed on 5 January and has risen by as much as 2% since then, as at 8 February 2021. We believe that a widening gap in growth expectations between the US and Europe is the driver. And this looks set to continue for the near term.
  • While burgeoning US growth is an unalloyed positive for emerging markets (EM), a stronger dollar is not. However those growth benefits manifest over time while the dollar moves rapidly. We believe the weight of the US fiscal and external balance deficits will eventually re-assert themselves as dominant dollar drivers.
  • One key metric to watch for a change in sentiment should be rates of vaccination, which have lagged badly in Europe and appear to be gaining some steam in the US after a slow start.

How changes in US and eurozone growth expectations have impacted the dollar

Since we wrote our last note, fairly dramatic changes in the relative growth expectations of Europe and the US have, in our view, led to the turnaround in the dollar.

The fall in Q4 eurozone GDP was actually less than expected. However, the combination of extensions to counter-pandemic restrictions through January, and slow progress in vaccine roll-out has triggered some concern over the outlook for this year.

The chart below illustrates the divergence in growth expectations for the eurozone and the US.  


This second chart shows the turnaround in economic surprise indices in favour of the US. And the move has been accompanied by a pick-up in the US dollar relative to the euro. 


What are the implications for emerging markets?

Over a short time horizon, it seems probable that US dollar strength could persist, with potential near term damage to EM sentiment given pretty robust positioning in many currencies. The US fiscal package, which will likely be passed, and a lack of monetary policy shifts on either side could contribute to this.

Over a longer time horizon, however, it is still likely that significant deterioration in the US fiscal and trade balances will eventually weigh on the dollar.

One near term metric that should carry a disproportionate amount of weight with investors is the rate of vaccinations as a short-hand for medium-term growth prospects. Here, Europe has lagged badly. For example, over the seven days to 3 February, according to the most recent data from, the large European countries have vaccinated less than 1% of their populations while the US has vaccinated 2.8%.