Emerging markets' dollar debt threatens global growth

Data: Institute of International Finance; Note: Values not adjusted for inflation; Chart: Harry Stevens/Axios

The continued strength of the dollar has been a headwind for U.S. businesses and it may begin to put a major strain on economies outside of the United States.

Where it stands: The share of debt issued by emerging market countries in dollars rose to an all-time high in the first quarter, data from the Institute of International Finance shows. If the currency trend doesn't change soon, countries already struggling with weakness at home will find themselves in serious trouble when these bonds need to be repaid.

  • While risk assets from global stocks to high-yield "junk bonds" have delivered strong returns to investors so far this year, emerging market currencies, which typically rally in such an environment, have missed the party entirely.
  • MSCI's Emerging Markets Currency Index last week fell to its lowest level in more than 3 months while the dollar index rose to its highest since June 2017.

Why it matters: The weakness in EM currencies suggests the market is still worried about the global economy, despite strong and steady economic readings from the U.S. and improvement in China.

The big picture: EM's problem children, Argentina and Turkey, have seen their currencies fall by around 13% and 9% against the dollar so far this year, after record losses in 2018. Both are experiencing recessions and analysts worry that defaults in 1 or both countries are on the horizon.

  • The dollar's strength could become "a chronic source of macroeconomic instability," the IIF warns.

The bottom line: Emerging market economies now make up 60% of global growth. Their health is imperative for the world economy to continue moving forward, and the dollar's strength has been weighing on it.

Go deeper: The global economic whiplash between stocks and currency markets