Weaker Dollar Cycle Boosts Appeal of Emerging Market Debt

A weaker U.S. dollar cycle is boosting the appeal of emerging market debt, creating a compelling case for investors seeking income and diversification at an opportune time for the asset class.

The U.S. dollar's failure to rally significantly since the Iran war began brings into question its traditional safe-haven status. Over the longer term, several factors support further depreciation of the U.S. dollar, conditions that have historically been favorable for emerging market debt, particularly EM debt held in local currencies.

The dollar is trading at elevated levels relative to historical norms, with valuations indicating limited upside and a risk of mean reversion. Investor positioning is heavily skewed toward the dollar, which could lead to a broad-based reallocation away from the dollar and into undervalued currencies, including those in EM.