In the month leading up to June end, when the US Dollar Index (DXY) fell 1.85%, the MSCI Emerging Markets Index—benchmark for global investors seeking exposure to developing emerging market economies—surged nearly 6%. But as the dollar index steadied through 28 July, EM gains also moderated, with the MSCI EM Index rising only 3.04%, according to Bloomberg data.
Whether this poses a risk to foreign inflows into EM stocks is now anybody’s guess.
Prolonged periods of a strong US dollar are often associated with underperformance in emerging market equities.
In the month leading up to June end, when the US Dollar Index (DXY) fell 1.85%, the MSCI Emerging Markets Index—benchmark for global investors seeking exposure to developing emerging market economies—surged nearly 6%. But as the dollar index steadied through 28 July, EM gains also moderated, with the MSCI EM Index rising only 3.04%, according to Bloomberg data.
Whether this poses a risk to foreign inflows into EM stocks is now anybody’s guess.
EM inflows rose modestly to $967 million in the week ended 25 July from $173 million the previous week, yet well below the $2.3 billion average seen over the past four weeks, according to Elara Capital’s 25 July report.
How does the US dollar affect EM flows?
When the dollar weakens, EMs attract more investor flows. The MSCI EM Index jumped about 17% in 2025 till 28 July against the DXY’s 9.1% decline.
“A softer dollar was a major tailwind for inflows into EMs,” said Sunil Jain, vice president at Elara Capital. However, the DXY has slightly steadied over the past two weeks and even saw a recovery last week, putting pressure on EM sentiment, he explained.
Foreign investors offloaded Indian equities worth ₹96,972 crore between January and July 2025, a sharp reversal from the net inflow of ₹30,813 crore seen during the year-ago period.
The DXY picked up momentum over the past three weeks, rising 0.69% in the week ended 7 July, 0.64% in the week ended 18 July, and 1.5% in this week ending 1 August, reflecting continued strength in the greenback.
“The rebound in the dollar can act as a drag on EM flows,” said Nilesh Shah, managing director, Kotak Mahindra AMC.
Aren’t there other factors to consider?
There are. Shah explained EM flows are a function of multiple factors, including currency. He said long-term investors also consider earnings growth, valuation, and current account or balance of payment position to allocate money.
EMs attract money “more on growth and less on currency view”, he clarified.
Even Ashish Gupta, chief investment officer of Axis Mutual Fund, said the weakening US dollar may not be the sole catalyst behind inflows into EMs.
He pointed out that recession fears and trade-related uncertainty in the US have largely receded, reshaping the investor sentiment and thereby strengthening the case for investments into the US markets. “The key US indices are again nearing their all-time high now, which suggests that money may be again gravitating back towards the US, potentially slowing inflows into EMs.”
On Monday, Nasdaq and the S&P 500 hit an all-time high of 21,202.00 and 6,401.07 points, respectively.
What’s the outlook?
The DXY broke below its three-year support level of 100 in April 2025, triggering a surge in EM inflows. And a move back above the 100 level could threaten this trade, said an 18 July Elara Capital report.
In its monthly letter to investors, the global investment firm UBS suggested reducing excess dollar exposure. “We expect lower interest rates, combined with fears about political interference, to affect the US dollar,” it said in a 1 August note.
Even American investment firm JP Morgan highlighted in its 14 July note that while tactically, in the short term, the US dollar could firm up a bit, “we believe it will remain under pressure in the medium term, in the second half, and that has historically led to imported inflation moving up”.
