轉捩點：美元周期轉向對新興市場債券的影響（只供英文版）

The end of a long era

A confluence of events in recent months has led to a consensus view that the US dollar’s multi-year bull-run is finally reaching its end. For some time, we have believed that the US’s large twin deficit (fiscal plus current account), together with the overvaluation of US assets, would act as a gravitational force against the elevated level of the dollar. Now it appears¹ that a weaker dollar could be a key priority for the US administration as it seeks to increase the competitiveness of US production. As the scales begin to tip on the greenback, this paper charts the path of the US dollar over the past decade, explains why devaluation appears likely from here, and outlines the implications for investors in the EM debt asset class.

The strong dollar has been a dominant driver of asset class returns

Considering the past 50 years, the US dollar appears to be part-way through its third cycle. From when this cycle began in 2011 to the end of 2024, the US dollar strengthened by over 40% on a trade-weighted basis – rallying from particularly cheap valuations around the time of the Euro crisis, to a level which most would agree to be very extended.

During this period, for the many foreign investors who did not hedge their exposure to the dollar, this appreciation added to the phenomenal returns generated by US assets. In other words, for over a decade, through an extended period of US “exceptionalism”, European and Asian investors gained an additional boost on their US investments.

However, for those investing in EM debt, the past decade has been painful. Considering the most recent US dollar cycle, the weakening phase that began in 2003 boosted EM local currency debt returns, but since 2011 the dollar’s relentless rise has had the opposite effect (Figure 1).

Figure 1. The US dollar cycles of the past 50 years²

Source: Bloomberg, JPMorgan, as at April 2025. EM local currency debt market = JPMorgan GBI-EM Global Diversified unhedged. *Returns annualised from 31 Dec 2002 to 31 Dec 2011. 31 Dec 2002 used as this is the inception date of the index. **Returns annualised from 31 Dec 2011 to 30 April 2025. For important information on indices, please see important information.

Just how overvalued has the dollar become?

Much like in previous episodes of extended dollar strength, the dollar’s continued appreciation has introduced a number of global economic imbalances – not least, a meaningful contribution to the fall in the competitiveness of US manufacturing production. Unsurprisingly, this has been a political flashpoint ever since President Trump’s first term. What is perhaps surprising is the extent of this shift, which – history suggests – could point to a tipping point for the greenback.

While there are various ways to measure an economy’s loss of relative competitiveness, we have taken a very simple approach by considering the differences between GDP measured in US dollars and GDP measured in purchasing power parity (PPP) terms across countries.

The former is essentially a measure of the value of goods and services produced by a country in current US dollars. However, measuring GDP in PPP terms adjusts GDP for differences in the cost of living between countries. In other words, GDP measured in PPP terms is a better indicator of the volume of what’s produced rather than the value of what’s produced.

PPP measures of GDP need to be standardised – by definition, that means US GDP measured in nominal US dollars is equal to GDP measured in PPP terms, i.e., US$30 trillion. However, there are stark differences between PPP and US dollar-based GDP across countries. In the case of China, to pick a pertinent example, PPP-based GDP is around 2x larger than US dollar-based GDP. In US dollars, China’s GDP is US$20 trillion (66% of US GDP) but in PPP terms, China’s GDP is around $40 trillion (33% larger than the US). Another way to think about this is to say that in China it costs half as much to produce goods and services, build infrastructure and invest in people as it does in the US. India is an even more extreme example: here, PPP-based GDP is 4x larger than US dollar-based GDP; and compared to China, India is half as cheap again when it comes to production and investment – it’s no wonder then that Apple has been moving the production of iPhones from China to India. If we extend this analysis across countries, we find that the average ratio of PPP-based to US dollar-based GDP in emerging markets is 2.4x (yes, among EM peers, China is relatively expensive!). Across developed markets, the ratio is around 1.3x, with Japan at 1.5x and Germany at 1.4x (Figure 2).

Figure 2: GDP in PPP terms relative to GDP in US dollars, compared to the trade-weighted dollar

Source: IMF, US Federal Reserve, Ninety One calculations. As of April 2025.

Have we reached a tipping point?

Tracking the ratio of PPP-based to US dollar-based GDP over time reveals two things.

1. Firstly, the relative expensiveness of developed and emerging markets closely tracks the value of the US dollar. This is entirely expected, of course, since currencies will affect the relative pricing of goods and services between countries. Indeed, currency valuations will be implicit in the calculation of PPP-based GDP. Think of the “Big Mac” index – the relative pricing of Big Macs across countries, measured in US dollars, is driven by two things: the cost of the inputs (thus the local price of the burger), and the relative value of the currencies.
2. The second observation is that today’s ratios of PPP-based to US dollar-based GDP are at the highest levels in almost 25 years, mirroring the last peak in the US dollar in 2001/2002, which preceded a sharp correction. In fact, considering developed markets only, the ratio is at the highest levels since the early eighties, a period when the extreme strength of the dollar ultimately led to Reagan’s Plaza Accord in 1985. This suggests a turn in the US dollar cycle is getting close.

How much might the dollar weaken and what does that mean for economies?

For some smaller EM economies that have borrowed predominantly in US dollars, the strengthening of the dollar has posed a challenge by raising their levels of debt measured in local currency terms. However, for others it has been a major boost. Many large emerging market economies have benefited from the steady appreciation of the dollar as a lower cost of production has boosted their export sectors. And this was not purely an EM phenomenon – the US dollar has strengthened against almost all currencies, with manufacturing in Europe, for example, also benefiting. Given this, it is understandable why many market participants believe the current US administration is keen to see the dollar weaken (or, at least, see the currencies of major trading partners strengthen). A weaker dollar will go a significant way to restoring relative competitiveness of the US. In 2011, when the dollar was 40% weaker, the US was one of the cheapest developed markets in which to manufacture goods.

For the US, unwinding this loss in competitiveness will be difficult, or at least would require a very significant devaluation of the dollar. Recall that production cost differences between the US and EM are substantial at more than 2x and that this is not only due to currency valuations – emerging markets have genuinely lower wages and costs of living to which the US is unlikely to find palatable (despite President Trump’s insistence that Apple return production to the US). The dollar would have to more than halve in value to counter this and such a sharp move would be highly destabilising for the US and the world. But a 20-30% devaluation of the dollar over time would at least restore some competitiveness against other developed markets, particularly Europe and Japan. A dollar depreciation of this magnitude would be tolerable for large emerging market economies, and even beneficial for smaller, more indebted, EMs.

Implications for investors in EM debt

For investors in EM debt, a weakening dollar would represent a welcome shift from headwind to tailwind.

Since the end of 2011, EM local currency debt has returned a paltry 0.9% per year as the yield on the asset class has been largely eaten away by the strength of the dollar. To be sure, other factors have contributed to the asset class’s poor performance, including the significant rise in inflation post-COVID, and Russia’s invasion of Ukraine. Looking ahead, though, with local currency bond yields above 6%³, even a modest depreciation of the dollar would mean a significant boost for investors as they earn a healthy yield relative to developed market bonds, while also benefiting from some currency appreciation.

Figure 3. EM local currency debt returns breakdown (% annualised)

Source: JPMorgan, Ninety One Calculations, 31 December 2002 – 30 April 2025. Index: JP Morgan GBI-EM Global Diversified unhedged. For further information on indices, please see Important Information.

In summary

The US dollar has appreciated by over 40% since 2011, reaching valuation extremes that have led to global imbalances and a loss of US manufacturing competitiveness.

Purchasing power parity comparisons highlight the dollar’s overvaluation, with GDP in emerging markets on average 2.4x higher in PPP terms than in US dollar terms, and much higher than they were in 2011. The current divergence in PPP GDP versus US dollar GDP’s mirrors past US dollar peaks that preceded sharp corrections, such as the early 2000s and the 1985 Plaza Accord. A tipping point in the US dollar cycle seems upon us.

A 20–30% dollar decline would likely restore US competitiveness against other developed markets and serve as a major tailwind for EM debt, particularly local currency bonds, which have underperformed during the dollar’s extended rally.

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¹ See various reports around a potential ‘Mar-a-Lago Accord’.
² This chart plots the US dollar real effective exchange rate (REER). We use the REER instead of DXY because the latter is heavily skewed to a few developed economies, while the former, weighted to actual trade volumes with the US, better reflects changing global economic patterns. Moreover, DXY is a nominal index that does not adjust for inflation differences between countries, whereas a real index adjusts for inflation differentials over time, showing the evolution of the real purchasing power of the US dollar.
³ JPMorgan GBI-EM Global Diversified Index, as at time of writing.