A Weaker Dollar Just Unlocked A Surprise 2025 Winner — And Smart Money Is Moving In

A sharp decline in the U.S. dollar is reigniting investor interest in emerging markets, prompting billions to flow into investment products tracking equities, despite Wall Street dominating headlines with new all-time highs.

The iShares Core MSCI Emerging Markets ETF IEMG—the top vehicle for U.S. investors seeking exposure to EM equities—registered $2.95 billion in inflows in June, its strongest monthly influx since January 2023.

Emerging market stocks are on track for a 5% monthly gain in both May and June, setting up the strongest two-month performance since late 2022.

The surge marks a significant shift in global positioning, particularly as investors seek relative value and macro tailwinds beyond U.S. assets, with the U.S. Dollar Index (DXY) dropping to its lowest level in over three years.

Weaker Dollar Reshapes Emerging Markets

Bank of America's chief investment strategist Michael Hartnett sees a powerful confluence of global forces working in favor of emerging markets.

In his recent note, the analyst said the rise of artificial intelligence is increasing demand for the raw materials that many EM countries produce, while a weakening U.S. dollar is removing one of the main barriers to capital inflows.

With EM equities still trading near multi-decade lows relative to U.S. stocks, Hartnett suggested the current setup makes an “easy allocation decision.”

Emerging markets have underperformed U.S. stocks – as tracked by the SPDR S&P 500 ETF Trust SPY – by 70% since 2013, yet they’re up about 10% year-to-date—on track for their best year since 2017.

Chart: Emerging Markets Have Lagged US Stocks By 70% Since 2013

Positioning To EM Stocks Still Light

David Hauner, head of emerging markets strategy at Bank of America, reinforced the bank’s optimistic view on EM assets.

He has maintained a bullish stance since President Donald Trump's inauguration and sees room for further upside, as investor positioning remains lighter than expected—despite solid year-to-date gains and a broadly weaker U.S. dollar.

He added that while U.S. fiscal concerns are rising, the main risk for EM would be "an unexpected dollar rebound" from the upcoming trade talks.

Historically, emerging markets have been vulnerable to rising U.S. yields, especially on the long end of the curve. However, recent price action tells a different story. Despite higher 30-year Treasury yields, EM local bonds and currencies have remained resilient.

"As long as DXY is down, EM returns tend to stay positive—even when U.S. yields rise," said Hauner.

Bank of America's historical data supports that view. Since 2008, when the Dollar Index declined, the MSCI Emerging Markets Index posted gains 72% of the time, with average monthly returns between 2.2% and 2.8%, depending on the movement in long-term U.S. yields.

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Image created using artificial intelligence via Midjourney.