Dollar strength shifts case for EM
Market take
Weekly video_20260629
Michel Dilmanian
Portfolio Strategist
BlackRock Investment Institute
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CAPITAL AT RISK. MARKETING MATERIAL.
Opening frame: What’s driving markets? Market take
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Title slide: Dollar strength shifts case for EM
With the dollar index at a one-year high, the question is no longer whether the dollar’s haven role is intact, but what a resilient dollar means for emerging markets, in our view.
1: Dollar decline worries are overdone
We see two factors behind the dollar’s recent rebound: increased market expectations for a US interest rate hike this year, and lower perceived risk around US assets. Those factors – plus strong US equity performance and portfolio flows – have supported demand for the dollar.
Our framework suggests current dollar support levels are broadly aligned with fundamentals – not indicative of a new dollar bull market. But we think the more important question for investors is: what does a broadly stable dollar mean for emerging markets?
2: Dual EM-dollar strength
The Federal Reserve is central to the dollar’s near-term outlook, in our view. We think Kevin Warsh’s first meeting as chair was more about preserving optionality, rather than signaling a more restrictive course. The takeaway? Current rate projections should be viewed as a snapshot rather than a commitment. This supports a stable dollar backdrop and makes broad currency calls less compelling – increasing the importance of country-specific opportunities.
3: Staying selective
This reinforces our preference for a selective approach. We favor beneficiaries of the AI investment cycle. Within our EM equity overweight, we see opportunities in Latin American regions that are positioned to benefit from AI-fueled demand for critical minerals. Yet we think a stable dollar environment reinforces the case for active country and sector selection instead of broad currency calls.
Outro: Here’s our Market take
The dollar’s haven role is still intact. Yet we think EM performance increasingly depends on local fundamentals and selectivity – not the direction of the dollar alone.
Closing frame: Read details: blackrock.com/weekly-commentary
Dual strength
The US dollar’s safe-haven status remains intact, yet a stronger dollar no longer automatically translates into broad emerging market weakness.
Market backdrop
Red-hot chip and memory stocks led a global equity retreat. We don’t see this as reflecting the ongoing revenue boost from the AI buildout.
Week ahead
US payrolls this week will be a key market test after the Federal Reserve’s hawkish tilt reinforced expectations for a rate hike later this year.
We pushed back against calls for the US dollar’s demise last year, arguing its safe-haven role remained intact. Recent market moves have supported that view. The US dollar index is at a one-year high after the Federal Reserve stoked expectations for a rate hike this month. The question is no longer whether the dollar can hold its ground, but what dollar strength means for risk assets, particularly emerging markets (EM). We see selectivity as key in EM.
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Dollar’s rate boost
US dollar index vs. trade-weighted two-year yield differentials, 2023-2026
Source: BlackRock Investment Institute, with data from LSEG Datastream, June 2026. Notes: The orange line shows the US Dollar Index (DXY). The yellow line shows the trade-weighted average US two-year yield differential versus Germany, Japan, the UK, Canada, Sweden and Switzerland (right axis), using DXY currency weights. Yield differentials are shown in percentage points.
Two factors have driven the dollar's recent rebound. First, markets have increased expectations for a US interest rate hike this year, widening interest rate differentials in the dollar's favor. Second, stable perceived risk around US assets, together with strong US equity performance and portfolio flows, has supported demand for the dollar. See the chart. After falling sharply following President Donald Trump's tariff announcements in April 2025, the US dollar index has recovered more than half of that decline, challenging the narrative that it had entered a new era of sustained dollar weakness. Much of the rally has come as markets reassessed the outlook for Federal Reserve policy. Yet we think some of the hawkish repricing in rate expectations may be overdone. Our analysis suggests current dollar levels are broadly in line with underlying fundamentals, making a sustained appreciation cycle less likely.
The Federal Reserve remains central to the dollar’s near-term outlook. Markets viewed Chair Warsh's first meeting as a hawkish surprise, even after months of repricing toward a higher-for-longer policy path. Yet we think the meeting was less about signaling a more restrictive course than preserving optionality as policymakers reassess the outlook. That means current rate projections should be viewed as a snapshot rather than a commitment. That supports a stable dollar backdrop.
A stable dollar environment
A stable dollar does not preclude opportunities in emerging markets. Instead, it leaves greater scope for country-specific fundamentals to differentiate returns. EM assets have performed well even without the dollar weakness that has typically accompanied periods of EM outperformance. The dollar still matters, particularly for economies with large external financing needs, but domestic factors and structural opportunities are becoming increasingly important.
Selectivity, rather than broad EM exposure, is key for investors. Structural investment themes that we have been highlighting — including artificial intelligence, infrastructure investment, energy security and rewiring supply chains - are creating opportunities that extend well beyond the US At the same time, differences in energy dependence, commodity exposure and policy credibility mean some economies are better positioned than others to benefit. The improving earnings outlook reinforces that view. Consensus now expects headline earnings per share for the MSCI Emerging Markets Index to grow by more than 50% this year versus 2025, compared with expectations for an increase of 18% at the start of the year. Within our EM equity overweight, we see opportunities in Latin America, where AI-fueled demand for critical minerals like copper and lithium should benefit the region’s commodity and energy exporters. Fixed income also offers selective opportunities. Many central banks have completed their tightening cycles, yet local rates remain elevated in several markets, creating attractive income potential across parts of the EM debt market. In our view, a stable dollar backdrop reinforces the case for active country and sector selection over broad currency calls.
Our bottom line
The dollar’s safe-haven role remains intact, but EM performance increasingly depends on local fundamentals and selectivity rather than the direction of the dollar alone.
Market backdrop
Chip stocks and memory makers led a global selloff in tech shares last week. The Philadelphia semiconductor index slid 8% on the week but is still up nearly 90% this year. The Nasdaq Composite shed 5%, while the S&P 500 lost 2%. We think AI-linked companies lifting guidance on revenue and profit margins show the AI buildout is rolling on. Oil hit pre-Middle East conflict lows, with Brent crude falling to $72 as Strait of Hormuz flows picked up. US 10-year yields fell to 4.37%.
The June payrolls report will be this week’s key market event in a shortened US trading week ahead of the July 4 holiday. Following a hawkish market reaction to the Federal Reserve’s last meeting, investors will watch the report closely for clues about the economy’s underlying strength and whether conditions could still support an interest rate hike this year.
Week ahead
Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from LSEG Datastream as of June 25, 2026. Notes: The two ends of the bars show the lowest and highest res at any point year to date, and the dots represent current year-to-date res. Emerging market (EM), high yield and global corporate investment grade (IG) res are denominated in US dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, ICE US Dollar Index (DXY), spot gold, spot bitcoin, MSCI Emerging Markets Index, MSCI Europe Index, LSEG Datastream 10-year benchmark government bond index (US, Germany and Italy), Bloomberg Global High Yield Index, J.P. Morgan EMBI Index, Bloomberg Global Corporate Index and MSCI USA Index.
June 30
US job openings; UK GDP; China manufacturing PMI
July 1
Euro area flash inflation
July 2
US payrolls; EU unemployment
July 3
UK service PMI
Read our past weekly commentaries here.
Big calls
Our highest conviction views on six- to 12-month (tactical) and over five-year (strategic) horizons, June 2026
| Reasons | ||
|---|---|---|
| Tactical | ||
| Favor AI beneficiaries | We favor infrastructure and equipment supporting the AI buildout such as semiconductors, power and data centers. We think they stand to benefit no matter AI’s eventual winners or losers. We see the AI boom lifting US corporate earnings, underpinning our US equity overweight. | |
| Selected international exposures | We like hard-currency EM debt on economic resilience, disciplined fiscal and monetary policy and a high ratio of commodities exporters. We’re also overweight EM equities, preferring commodity exporters and AI beneficiaries. In Europe, we favor equity sectors like infrastructure. | |
| Evolving diversifiers | We suggest looking for “plan B” portfolio hedges such as thematic opportunities related to the AI buildout and search for energy security. Long-term US Treasuries no longer provide a buffer against equity market declines, and gold also has shown to be an ineffective diversifier. | |
| Strategic | ||
| Portfolio construction | We favor a scenario-based approach as AI winners and losers emerge. We lean on private markets and hedge funds for idiosyncratic returns and to anchor portfolios in mega forces. | |
| Infrastructure equity and private credit | We find infrastructure equity valuations attractive as geopolitical fragmentation and the AI buildout underpin structural demand. We still like private credit but see an increase in dispersion of returns. This highlights the importance of manager selection. | |
| Beyond market cap benchmarks | We get granular in public markets. We are underweight DM government bonds as inflationary pressure mounts. Within equities, we lean into both EM and DM equity – and are selective in both. We like stocks across both regions that are supported by the accelerating AI buildout. | |
Note: Views are from a US dollar perspective, June 2026. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any particular funds, strategy or security.
Tactical granular views table
Six- to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, June 2026
We have lengthened our tactical investment horizon back to six to 12 months. The table below reflects this and, importantly, leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns – especially at a time of heightened volatility.
Granular views
Six- to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, June 2026
| Asset | Tactical view | Commentary | ||||
|---|---|---|---|---|---|---|
| Equities | ||||||
| United States |  |
We are overweight. Contained damage to global growth from the Mideast conflict and strong earnings expectations – particularly in tech – keep us risk-on. | ||||
| Europe |  |
We are neutral. Europe’s high exposure to the energy shock from the Mideast conflict makes it vulnerable to higher inflation and lower growth. | ||||
| UK | |
We are neutral. Valuations remain attractive relative to the US, but we see few near-term catalysts to trigger a shift. | ||||
| Japan | |
We are neutral. Japan’s exposure to imported energy may erode strong equity gains powered by healthy corporate balance sheets and governance reforms. | ||||
| Emerging markets (EM) | |
We are overweight yet stay selective. We favor Asian countries that manufacture critical AI components and Latin American energy and commodity exporters. | ||||
| China | |
We are neutral. Trade relations with the US have steadied, but property stress and an aging population still constrain the macro outlook. Relatively resilient activity limits near-term policy urgency. We like sectors like AI, automation and power generation. | ||||
| Fixed income | ||||||
| Short US Treasuries | |
We are neutral. Shorter-term bonds are relatively attractive as the market has woken up to persistent inflation and higher rates. | ||||
| Long US Treasuries |  |
We are underweight. Yields already faced upward pressure from rising term premia, as investors demand more compensation for the risk of holding long-term debt. The recent energy price shock compounds this by aggravating pre-existing inflationary pressures. | ||||
| Global inflation-linked bonds | |
We are neutral. We think inflation will settle above pre-pandemic levels, but markets may not price this in the near term as growth cools. | ||||
| Euro area government bonds | |
We are neutral short-term European government bonds. The market has repriced the ECB policy path more in line with our view. We think increased German bond issuance to finance its fiscal stimulus package is already largely reflected in the current level of 10-year yields. | ||||
| UK Gilts | |
We are neutral. We expect volatility in gilts over the near-term. Gas powers much of the UK’s electricity, but storage is limited – making it especially vulnerable to a resurgence in inflation. | ||||
| Japanese government bonds |  |
We are underweight. Rate hikes, higher global term premium and heavy bond issuance will likely drive yields up further. | ||||
| China government bonds | |
We are neutral. China bonds offer stability and diversification but developed market yields are higher and investor sentiment shifting towards equities limits upside. | ||||
| US agency MBS | |
We are overweight. Agency MBS offer higher income than Treasuries with similar risk, and may offer more diversification amid fiscal and inflationary pressures. | ||||
| Short-term IG credit | |
We are neutral. Corporate strength means spreads are low, but they could widen if issuance increases. | ||||
| Long-term IG credit | |
We are underweight. We prefer short-term bonds less exposed to interest rate risk over long-term bonds. | ||||
| Global high yield | |
We are neutral. High yield offers more attractive carry and shorter duration, but we think dispersion between higher and weaker issuers will increase. | ||||
| Asia credit | |
We are neutral. Overall yields are attractive and fundamentals are solid, but spreads are tight. | ||||
| Emerging hard currency | |
We are overweight. EM hard-currency indexes lean towards Latin American commodity exporters such as Brazil that stand to benefit as Mideast supply plummets. | ||||
| Emerging local currency | |
We are neutral. The US dollar has been strengthening as a safe-haven currency in the wake of the Middle East conflict. This could reverse year-to-date gains driven by a falling USD. | ||||
Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a US dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.
Euro-denominated tactical granular views
Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, June 2026
We have lengthened our tactical investment horizon back to six to 12 months. The table below reflects this and, importantly, leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns – especially at a time of heightened volatility.
| Asset | Tactical view | Commentary | ||
|---|---|---|---|---|
| Equities | ||||
| Europe ex UK | |
We are neutral. We would need to see more business-friendly policy and deeper capital markets for recent outperformance to continue and to justify a broad overweight. We stay selective, favoring financials, utilities and healthcare. | ||
| Germany | |
We are neutral. Increased spending on defense and infrastructure could boost the corporate sector. But valuations rose significantly in 2025 and 2026 earnings revisions for other countries are outpacing Germany. | ||
| France | |
We are neutral. Political uncertainty could continue to drag corporate earnings behind peer markets. Yet some major French firms are shielded from domestic weakness, as foreign activity accounts for most of their revenues and operations. | ||
| Italy | |
We are neutral. Valuations are supportive relative to peers. Yet we think the growth and earnings outperformance that characterized 2022-2023 is unlikely to persist as fiscal consolidation continues and the impact of prior stimulus peters out. | ||
| Spain | |
We are overweight. Valuations and earnings growth are supportive relative to peers. Financials, utilities and infrastructure stocks stand to gain from a strong economic backdrop and advancements in AI. High exposure to fast-growing areas like emerging markets is also supportive. | ||
| Netherlands | |
We are neutral. Technology and semiconductors feature heavily in the Dutch stock market, but that’s offset by other sectors seeing less favorable valuations and a weaker earnings outlook than European peers. | ||
| Switzerland |  |
We are neutral. Valuations have improved, but the earnings outlook is weaker than other European markets. If global risk appetite stays strong, the index’s tilt to stable, less volatile sectors may weigh on performance. | ||
| UK | |
We are neutral. Valuations remain attractive relative to the US, but we see few near-term catalysts to trigger a shift. | ||
| Fixed income | ||||
| Euro area government bonds | |
We are neutral short-term European government bonds. The market has repriced the ECB policy path more in line with our view. We think increased German bond issuance to finance its fiscal stimulus package is already largely reflected in the current level of 10-year yields. | ||
| German bunds | |
We are neutral. Markets have largely priced in fiscal stimulus and bond issuance, and expectations for policy rates align with our view. | ||
| French OATs | |
We are neutral. Political uncertainty, high budget deficits and slow structural reforms could stoke volatility, but current spreads incorporate these risks and we don’t expect a worsening from here. | ||
| Italian BTPs | |
We are neutral. Demand from Italian households is strong at current yield levels. Spreads tightened in line with its sovereign credit upgrade, but a persistently high debt-to-GDP levels means they likely won’t tighten further. | ||
| UK gilts | |
We are neutral. We expect volatility in gilts over the near-term. Gas powers much of the UK’s electricity, but storage is limited – making it especially vulnerable to a resurgence in inflation. | ||
| Swiss government bonds | |
We are neutral. We don’t think the Swiss National Bank will slash policy rates to below zero, as markets expect. | ||
| European inflation-protected securities | |
We are neutral. Our medium-term inflation expectations align with those implied in current market pricing. | ||
| European investment grade | |
We are neutral. We favor short- to medium-term debt and Europe over the US An intense re-leveraging cycle to support the AI buildout could put upward pressure on US spreads, making Europe relatively more attractive. | ||
| European high yield | |
We are overweight. Spreads hover near historic lows, but credit losses have been limited in this cycle and better economic growth in 2026 could reduce them further. | ||
Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a euro perspective, June 2026. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.
Meet the authors
Jean Boivin
Head – BlackRock Investment Institute
Wei Li
Global Chief Investment Strategist – BlackRock Investment Institute
Axel Christensen
Chief Investment Strategist for Latin America — BlackRock Investment Institute
Michel Dilmanian
Portfolio Strategist – BlackRock Investment Institute
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