Emerging Markets: Fidelity's 2026 Weak Dollar Gains Prediction and Market Dynamics

This analysis is based on the Reddit discussion and associated market data [0][1][2][3][4][5]. Fidelity International’s 2026 prediction of EM gains from a weak dollar aligns with views from Morgan Stanley and Goldman Sachs [0]. The U.S. Dollar Index (DX-Y.NYB) is down 8.84% YTD 2025 [5], supporting the weak dollar narrative, while Russell Investments also expects sustained USD weakness to benefit EM [4].

EM assets are already performing strongly in 2025—MSCI indexes show their best year since 2017 [0], and the Hang Seng Index is up nearly 30% YTD [1]. Chinese state banks have been purchasing dollars to slow yuan appreciation [2], a currency intervention noted in the discussion as a bearish factor on EM upside.

The projected 2026 capital inflows suggest a potential return to EM markets, contingent on the Fed adopting a dovish stance and global economic stabilization [0]. However, Citigroup advises hedging against possible dollar rebounds, introducing a conflicting perspective [0].

1. Currency dynamics drive cross-sectional EM performance
   : While a weak dollar generally benefits EM assets, Chinese state bank interventions to slow yuan gains create a nuanced landscape, indicating that currency management policies can counteract broader dollar trends for specific EM economies [2].

2. 2025’s strong EM performance sets the stage for 2026 expectations
   : The YTD gains (nearly 30% for Hang Seng) [1] and record year per MSCI [0] suggest existing momentum, but Fidelity’s prediction adds conditional upside tied to Fed policy and dollar weakness.

3. Diversification remains critical amid structural risks
   : Corruption and liquidity issues (exemplified by the Jamaican aluminum mine cash-out challenge) are persistent structural barriers that can limit returns despite favorable macroeconomic conditions [0].

• Fed rate cuts and global economic stabilization could trigger significant 2026 capital inflows into EM assets [0].
• Crisis-priced EM currencies may offer appreciation potential if macro conditions align [0].
• Sustained dollar weakness (8.84% YTD decline in 2025) [5] provides a tailwind for non-U.S. markets, including EM [3][4].

• Potential dollar rebound: Citigroup’s hedging advice highlights uncertainty in dollar direction [0].
• Corruption and liquidity constraints continue to be major barriers to realizing EM investment returns [0].
• Currency interventions (e.g., Chinese state banks buying dollars) may limit EM currency gains [2].

Fidelity International, Morgan Stanley, and Goldman Sachs predict EM gains from a weak dollar in 2026 [0]. EM assets have had their best year since 2017 in 2025 [0], with the Hang Seng Index up nearly 30% YTD [1] and the U.S. Dollar Index down 8.84% YTD [5]. The Fed’s dovish stance and global economic stabilization are key prerequisites for projected 2026 capital inflows [0]. Investors should note structural risks (corruption, liquidity) and conflicting views on dollar direction (Citigroup’s rebound warning) [0].