27 FEBRUARY 2025
In an uncertain world, one thing is abundantly clear…President Trump wants the US dollar to weaken. And he is likely to use that as a bargaining chip in trade negotiations with China.
Assuming he gets his way, and the greenback does retrace some of its recent gains, the stage will be set for big gains in emerging market stocks.
The chart below shows the DXY trade-weighted dollar (blue line) versus the Emerging Markets equity index (red line) going back to 1988.
The dollar has experienced three meaningful downtrends over that period; the early 1990s, the early 2000s and 2017-2021.
It’s relevant that the last episode coincided with Trump’s first term.
On each occasion, emerging market equities staged big bull markets and they would likely do so again if the dollar weakens from here.
It also plays into the idea that a weaker dollar could form part of a US/China reconciliation.
Chinese equities make up around a quarter of the Emerging Markets index and are primed to rally strongly in a scenario that sees trade tensions ease, particularly if the authorities amplify their efforts to stimulate the domestic economy.
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