Trying to Predict USD Returns in Markets After USD Strength
by Dr Leila Heckman, September 11, 2018

Over the last several months, a strengthening US dollar especially against several emerging market currencies has raised concerns over the equity markets in emerging markets.  This concern arises from several sources, including the ability of emerging markets to pay off dollar-denominated debt, money flowing out of emerging markets due to competition from rising yields in the U.S. and the vicious cycle of poor US dollar return performance for investments in markets in which the currency is depreciating.  This year, large depreciations in markets have occurred in markets, Turkey, Brazil, India, South Africa, Pakistan, and Argentina.

A natural question for investing in non-US equity markets would be if the US dollar has been  strengthening over the last several months,  does it help in predicting how US dollar returns will do in those markets in the future? Is it true that when the US dollar has been strong over the past 3 to 6 months, do those equity markets (where the us dollar has been strengthening),  do poorly in subsequent months in US dollar returns relative to other markets?

In this analysis, for each non- US developed and emerging market, the US dollar return alpha relative to the MSCI ACWI (which includes the US) was computed each month after the US dollar strengthened over the previous three months relative to the foreign market.  The alpha was averaged over 5 year periods for each set of markets as well as over individual years. The table below shows the results:

Average Monthly Alphas relative to MSCI ACWI subsequent to $US strength over the past 3 months

Non-US Developed Markets Emerging Markets Crisis Markets
Five Year Periods
1988-1992   0.38%   2.01%
1993-1997   0.20%  -0.19%
1998-2002   0.36%   0.31%
2003-2007   0.75%   1.40%
2008-2012  -0.30%   0.10%
2013-2017  -0.30%  -0.80%
Individual Crisis Years
1997  -0.41%  -1.70% -6.47% (Emerging Asia)
1998    0.39%  -2.08% -9.74% (Russia)
2001    0.74%   2.17% -4.86% (Argentina)


  • On average, country equity markets tend to outperform MSCI ACWI following US$ strength over the previous 3 months.
  • However, this is not always the case, especially in crisis areas such as Emerging Asia during and after the Asian crisis and Russia during and after the default and devaluation.