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EM's Winning Streak Survives Two Shocks — But the Currency Leg Is Cracking

Since a spring-2025 inflection EM has outrun developed peers into 1H26, but on July 1, 2026 the MSCI EM Currency Index erased nearly all of its year's gains.

Emerging markets have beaten developed peers by a wide margin since a spring-2025 inflection, and that lead extended into the first half of 2026. But the half closed on a warning: on July 1 the MSCI Emerging Market Currency Index fell 0.2%, erasing essentially all of its 2026 gains as the dollar resurged.

Source: Alpha Vantage. EEM = iShares MSCI Emerging Markets (subject); URTH = iShares MSCI World (developed-market comparator); CEW = WisdomTree Emerging Currency Strategy, a proxy for the MSCI EM Currency Index. ETF proxies are USD-denominated and will differ from local-currency index closes.

An inflection that hardened into a trend

The turn began in April 2025 — not on domestic catalysts but on a US policy pivot. As trade tumult and doubts over Fed independence drove the dollar to a three-year low, capital rotated outward: EM equities erased their year's losses and began beating the S&P 500, while the currency gauge logged its strongest rally since 2017. The year finished stellar — local-currency bonds returned about 7%, the best since 2020, and the currency index rose more than 6%.

Momentum carried into 2026, with roughly $6bn flowing into the iShares Core MSCI EM ETF in January alone — its biggest monthly inflow since 2012. The advance topped 15% at the Q1 peak before an Iran-war energy shock briefly wiped it out in late March, then rebounded to fresh record closes by May 11.

The dollar is the fragile link

The nuance now matters: 1H26's outperformance was led by the Asian AI complex — Samsung, SK Hynix, Alibaba, TSMC — not by currencies. The original 2025 engine, a weak dollar, is where the trend is fraying. On July 1 the currency index slid toward its lowest since April 7 as markets repriced for a more hawkish Fed under new chair Kevin Warsh, with money markets pricing roughly a one-in-three chance of a hike.

The forward tension is clear. Supercycle bulls need the weak-dollar regime to persist; a Warsh-driven hawkish turn is the single biggest threat, with Middle East oil the secondary swing factor. EM's lead survived two shocks — but it is narrowing, and the currency channel is the crack to watch.