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Here’s How The Rising Dollar Affects Emerging Markets

Monday, November 28, 2016 5:25
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(Before It's News)

From Larry Edelson: The greenback has been on a tear as of late, rallying over 5% since the dollar index bottomed out just below 96 on election night.

In fact, the dollar index rose for 10 days straight — the biggest surge since May 2015.

That puts the dollar at its best level in over 14 years.

Reasons: Simple … 

FIRST, is all the flight capital leaving other countries and regions of the world that are in far worse shape than the U.S. Europe is going down the drain. So is Japan. So is the Middle East.

Plus, the more China opens up its currency market, the more yuan leave as wealthy Chinese get the opportunity to diversify and invest … and their main target is the U.S. of A.

SECOND, is that the dollar is now pricing in an inevitable rate hike from our Federal Reserve.

And THIRD, is general optimism over President-elect Trump’s policy of strongly desiring to repatriate the nearly $3 trillion of U.S. corporate money sitting overseas. A tax holiday of some sort is in the offing for that huge stash of cash and repatriating it would be hugely bullish for the dollar and for the U.S equity markets.

So it’s no surprise that my AI models have forecasted this rise in the dollar for some time now. And those same models are telling me that this trend should continue.

In fact, this chart clearly shows that the dollar index could easily continue moving higher heading into next year …

So, what does this all mean?

Most would argue that a stronger dollar may have significant financial, as well as trade, effects on emerging markets.

Reason: Many companies in these markets have borrowed in dollars. So the cost of repaying their debt rises when the greenback gains ground against their domestic currencies.

Plus, much of this borrowing is conducted through the banking system, leaving the banks exposed to the risk of a rising dollar.

In other words, a stronger dollar could cause a tightening of credit conditions in emerging markets — leading to slower growth.

The good news is that if the dollar continues rising — as I expect it will — emerging market exports become even cheaper. That can be a big driver of demand, sales and profits. And that means more growth globally and here in the U.S.

Unless President-elect Trump trashes trade deals and slaps tariffs on China and other countries that rely on exports. Then we’ll have a real mess on our hands, not unlike the trade wars of the 1930s.

For now, I recommend staying in dollars. Even if President-elect Trump starts to talk tough again on trade, it will be some time before anything concrete is decided.

The iShares MSCI Emerging Markets Index ETF (NYSE:EEM) rose $0.09 (+0.26%) to $35.34 per share in premarket trading Monday. Year-to-date, the largest fund tied to emerging market equities has gained 9.51%.

This article is brought to you courtesy of Money and Markets.

You are viewing an abbreviated republication of ETF Daily News content. You can find full ETF Daily News articles on (www.etfdailynews.com)

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