What a stronger dollar actually does to emerging-market debt

The dollar index climbed to its highest level in fourteen months this quarter, and coverage has mostly framed this as bad news for emerging markets in general terms. The actual mechanism is narrower and more specific than that framing suggests.

Countries that borrowed in dollars, rather than in their own currency, owe the same dollar amount regardless of what their currency does. That debt gets more expensive to service in local-currency terms as their currency weakens against the dollar, and the pain shows up not immediately but at the next refinancing.

Roughly a third of emerging-market sovereign dollar debt coming due in the next eighteen months belongs to a small group of countries already running current-account deficits, which makes them the ones actually worth watching — not emerging markets as a category.