Dollar Drowning: DXY Cracks 98—Emerging-Market Bulls Smell Blood
The U.S. Dollar Index (DXY) slipped under 97.0 this morning—its lowest print since March 2022 and capping a ~10 % collapse year-to-date. It’s the worst first-half showing for the greenback in the modern float era.
Why the buck broke
Rate-cut fever: Futures now price an 85–90 % chance the Fed starts easing in September.
Twin-deficit drag: Treasury supply keeps ballooning while growth cools, eroding the dollar’s real-yield edge.
Policy noise: Traders keep one eye on tariff headlines and a Fed that’s under constant political pressure.
What Wall Street desks are whispering
> “The cease-fire in the Mid-East knocked out the last big volatility bid—systematic models are de-leveraging long-dollar exposure en masse.”
> “We’ve gone structurally bearish USD; 40 % of PMs we survey are upping hedges against further depreciation.” - Bank of America
Carry traders already pounced
With the greenback cheaper than the yen on funding screens, dollar-funded carry trades are roaring back into INR, IDR, BRL, TRY and friends. Reuters puts last month’s EM bond inflow at a record $3.8 bn — the eighth straight weekly uptick.
Flows & performance snapshot
EEM – MSCI Emerging-Markets ETF, +15.8 % YTD (through 27 Jun)
Best first half since 2017; assets now around $18.3 billion.
EWZ – iShares Brazil ETF, +22 % YTD
Brazil’s real offers ~9 % carry, drawing fresh equity demand.
EMLC – VanEck EM Local-Currency Bond ETF, +11 % YTD
Logged eight consecutive weeks of inflows.
Trade ideas (not advice—run your own screens)
- Long EM beta vs. short dollar-beta: Buy EEM or a basket of EWZ/INDA while hedging with short UUP (Invesco Dollar Bullish).
- Local-currency bond kicker: Add EMB or EMLC for yield if you think Fed cuts land on schedule.
- High-carry FX pairs: Borrow USD → lend into INR or IDR while volatility stays muted.
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What could break the party?
* A hawkish Powell pivot at July FOMC.
* Shock re-acceleration in U.S. inflation prints.
* A geopolitical flare-up that drives a flight back into dollars and Treasuries.
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Bottom line
The dollar’s three-year floor just gave way. Until the Fed—or a black-swan headline—reverses the tide, emerging markets finally get to play offense. Keep one eye on DXY < 96.5; that’s the next domino the quants say would force another wave of systematic EM buying.
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