After several years of continued US dollar strength, the currency has begun to soften. The shift may appear incremental, but beneath the surface it is reshaping the investment landscape, particularly for emerging markets (EM).
With improving fundamentals, attractive valuation and policy anchors that have strengthened across much of the developing world, the stage may be set for a constructive new phase of emerging markets performance.
Yet global investors remain structurally underweight. A closer look at what is driving this turn in the dollar and how emerging markets are responding, suggests that this may be a moment worth seizing.
Why dollar weakness may have more room to run
A key reason dollar weakness may have room to run is that currency cycles are typically long, tending to last years not months. Since 1983, periods of dollar appreciation and depreciation alike have lasted about 10 years. In this context, the dollar is still relatively strong versus its long-term history.
That starting point alone suggests that the current down cycle may still be in its early innings. At the same time, structural forces beneath the dollar are shifting.
Central banks have been gradually diversifying their reserves away from the US dollar toward gold and other currencies; in fact, major reserve holders such as China and Russia have reduced their dollar exposure meaningfully in recent years. These moves are slow but persistent and they ease one of the historical pillars of dollar demand.
Fiscal dynamics also play a role. The US continues to run deficits near historical peacetime highs and with foreign ownership of dollar denominated assets close to record levels, even moderate dollar weakness can prompt rebalancing away from US assets toward regions offering stronger growth or better valuations.
Against this backdrop, investors increasingly weigh the predictability of US economic policy, a factor that reserve managers in particular scrutinise when deciding long-term currency allocations. Together, these structural considerations support the view that dollar softness may persist.
How a softer dollar supports emerging market performance
A softer dollar tends to act as a powerful tailwind for emerging markets performance and 2025 already provided a strong example. As the dollar weakened, EM assets surged: the MSCI Emerging Markets Index rose 33.5% in 2025 , nearly double the S&P 500’s return.
These moves illustrate how currency relief can amplify improving fundamentals. For equities, a weaker dollar often translates into stronger dollar-denominated returns, improves the competitiveness of emerging market exports and supports global risk appetite, which in turn draws capital back into EM markets
Credit markets also benefit. When emerging market currencies appreciate, servicing dollar-denominated debt becomes less burdensome, strengthening balance sheets at both the sovereign and corporate levels. This often results in spread compression and improved creditworthiness.
Historically, softer dollar environments have corresponded to lower default risk across emerging market economies and greater fiscal space, giving policymakers more flexibility to support growth.
For commodity exporting countries, the benefit compounds: weaker dollars tend to support higher commodity prices in local currency terms, lifting export revenues and stabilising external accounts.
A stronger macro backdrop gives emerging markets additional support
The broader macro backdrop in emerging markets has evolved in ways that position these markets to capitalise on the currency shift. Many EM central banks began tightening monetary policy well before their developed market peers, leaving them with higher real rates and credible inflation fighting credentials.
With imported inflation easing as currencies strengthen, several emerging market countries have been well positioned to gradually cut rates from a place of policy strength, supporting domestic demand without re igniting inflation.
This combination of currency support, policy credibility and room for calibrated easing forms a compelling macro foundation.
Navigating emerging market volatility with discipline
At the portfolio level, navigating emerging markets successfully still requires a steady, disciplined approach. The volatility inherent in emerging markets remains an inescapable feature; currency swings, shifting political landscapes and global trade disruptions all have the potential to spark short-term turbulence.
But disciplined stock selection and risk controlled allocation can turn volatility into opportunity rather than vulnerability. A consistent focus on companies with durable earnings, strong balance sheets, and governance standards that support long-term value creation helps ensure that the portfolio participates in upside markets while remaining resilient in stress periods.
This steady, time tested approach is essential in environments where macro narratives, such as the dollar’s trajectory, can shift rapidly.
Diversification also plays a critical role in navigating volatility. Allocating across regions, sectors, and currency exposures helps smooth idiosyncratic shocks and allows investors to harness multiple sources of return.
For instance, stronger local currencies tend to support consumption-led businesses, financial institutions benefit from easing inflation and more predictable monetary cycles, and export-oriented companies with natural dollar hedges can thrive even when global conditions are uncertain. Blending these exposures creates a portfolio that is not reliant on any single macro scenario.
For investors who have remained underweight emerging markets, the combination of improving fundamentals and a softer dollar presents a strategic opening.
Valuations across emerging market equities remain at extended discounts to developed markets. With capital flows still light and sentiment cautious, any sustained re allocation into EM could have a meaningful impact on returns. The currency environment need not be perfect; it need only avoid being a headwind.
The dollar’s recent weakness is not the sole driver of the opportunity, but it is a significant one. When combined with healthier macro foundations, stronger balance sheets, and the disciplined navigation of volatility, it creates a setup that investors may want to revisit with fresh eyes.
If the dollar continues to drift lower, or even remain range bound, the next leg of emerging market performance may already be quietly underway.
Sammy Suzuki is head of emerging markets equities at AllianceBernstein. The views expressed above should not be taken as investment advice.