Effect of US Dollar on Emerging Markets in Developing Countries

This article will concentrate on the role of the United States dollar on emerging markets in developing countries, we will give you a little brief on the role of the United States dollar in the world’s economy.

Still on this post, we will also answer some questions regarding the effect of the US dollar on emerging markets in developing countries. Below are some of the questions that people asked online;

How does the US dollar affect emerging markets?

Why is weak US dollar good for emerging markets?

How a volatile dollar hurts emerging markets?

What is the impact of a currency war on emerging markets?

Before we go into the effect of the US dollar on emerging markets in developing countries, it will be pertinent to first talk about the power of the United States dollar and its influence in the world’s economy.

What is tThe United States dollar play a significant role in the global stock exchange and this makes it the most versatile currency in the world. Stocks are generally valued in dollars, the demand for the United States dollar over the years has increased tremendously. This is why any change in the rate or value of the United States dollar has either a positive or negative impact in the world economy.

he role of the US dollar in the world’s economy?

The US dollar occupies a unique role in the international monetary system, when the US dollar is strong, the global economy is affected, the same thing applies when the dollar gets weak.

How does the US dollar affect emerging markets?

Emerging markets in developing countries are constantly in need of support and extra push for them to grow, this is why the role of the United States dollar in emerging markets can never be overestimated. 

Developing countries need to study the performance of the United States dollar in the global exchange market so as to know when to borrow and when to pay back.

When a dollar gets weak, emerging market economies that may have borrowed debts in U.S. dollars always benefit, this is because a weak dollar will enable them to be able to service their debts. A weak dollar also raises the U.S. investors’ value of assets that are foreign currency-denominated.  A weaker dollar hugely leads to gains for emerging markets. However,  a strong dollar is a piece of bad news for the economies of emerging markets. 

Why is weak US dollar good for emerging markets?

Just like we have said above, when the dollar is weak, it makes it easy for emerging market economies to be able to repay their dollar-denominated loans. It also raises the value of foreign currency-denominated assets for the United States investors. Emerging markets also make gains when the U.S. dollar gets weak.

How a volatile dollar hurts emerging markets?

Most emerging-markets countries borrow dollars in other to finance economic growth, they will find it difficult to service such loans if there is a dollar surge. Developing countries that have U.S. dollar denominating loans can be thrown into crisis if the dollar gets stronger while the value of the country’s currency significantly falls.

A volatile dollar hurts emerging markets in developing countries by preventing them from being able to service dollar-denominated debts and indirectly hinders their growth.

Inversely, a weak dollar will be a blessing to emerging markets in developing countries as these debts will  be serviced.

What is the impact of a currency war on emerging markets?

When there is a currency war, there may be erection of trade barriers, and greater protectionism which can hinder global trade. This situation will not be favorable for emerging markets in developing countries because they need international trades and collaborations for them to grow. In increase in currency volatility may arise as a result of competitive devaluation, this can lead to higher hedging cost for companies which will deter foreign investors from investing in the developing country’s emerging market.

Currency war stifles the growth of emerging markets in developing countries because investors will not be comfortable to invest in countries who can not trade internationally.

Effect of US Dollar on Emerging Markets in Developing Countries

A strong Dollar – when the United States dollar to naira black market today increases in value, emerging markets in developing countries find it difficult to function properly and grow, A strong dollar increases the value of their dollar-denominated indebtedness and makes it difficult or almost impossible to be serviced. A strong dollar also impacts local currency government bond markets, this could result in aa tightened credit conditions.

A weak Dollar – a weaker dollar presents a juicy opportunity for emerging markets in developing countries to make gains. It also makes it easier for them to service any indebtedness that was in the United States dollar. When the U.S. dollar is weak, the cost of borrowing is lowered and this greatly favors emerging markets.