Yesterday we talked about global trade as the most important driver of EM-wide returns over the medium term. Today we turn to the other crucial factor on the list, which can absolutely dominate market trends in the short run, i.e., global risk appetite and capital flows.

And here we have a simple, straightforward rule: Just watch the dollar. Trade-weighted dollar movements are the best barometer we have of market risk conditions and flows.

Sure enough, risk flows and the dollar have been massive independent drivers of near-term volatility. Over the past few years alone we saw the collapse of sentiment and huge USD strengthening in 2022 during the onset of the Russia-Ukraine war, a relative reversal and dollar weakness driving renewed market gains in 2023-24, the sudden strong-dollar "Trump trade" taking EM markets back down again at the end of last year ... and now the renewed USD weakening trend of the past year that has given a dramatic tailwind to emerging assets once again.

Where to from here? According to our colleagues at Applied Global Macro Research, despite renewed dollar strength today in initial response to war and fuel shocks, they still see dollar weakness as the theme ahead, with EURUSD trading at 1.20 at end-2026 and rising further over the medium term in light of US fiscal and monetary loosening and the loss of US policy confidence and visibility.