Market insights by Quoc Dat Tong, Senior Financial Markets Strategist at Exness.
The US dollar has been serving as the global trade currency for decades. Historically, inflation-driven rapid interest rate hikes in the United States and worldwide have threatened the economic welfare of emerging markets and developing economies (EMDEs).
Sharp increases in US interest rates contribute to the rising foreign exchange value of the dollar, and implicitly spill over into EMDE borrowing costs. But the link between US interest rates and emerging markets is more nuanced and deserves special attention. Capital outflows, increased financial market volatility, elevated debt servicing costs, and imported inflation are only some of the challenges facing EMDEs.
Let’s examine what all this means and attempt to find the light at the end of this tunnel.
US dollar strength and debt
Over the past decade, EMDE corporations have accumulated about 90% of foreign-currency debt, mostly in US dollars. Against the current backdrop of geopolitical tensions and the Trump administration’s tariff tangoing, this has raised concerns within the expert community.
On a macro level, economists have raised the alarm about the possibility of intensifying debt pressures fueled by an increasingly stronger US dollar. These pressures are felt more in countries with an elevated dollar-denominated debt.
In May 2025, the Federal Reserve launched its tightening cycle, broadly marked by a series of interest rate hikes. When it convened on 7 May, the Fed decided to maintain its interest rates in the ballpark of 4.25%-4.50%. Reverberations of this will likely be felt in emerging markets, particularly Asia.
Many of the region’s developing economies are tightly linked to global trade and the US dollar, hence their vulnerability to higher volatility and potentially negative growth as the greenback strengthens. Having accumulated substantial dollar-denominated debt over decades, these countries face a high risk of default if the cost of their…
