Amir Khamidullin

The US 10-year Treasury yield and the US dollar index (DXY) have started to clearly diverge, with important implications for emerging markets.

Under the usual macroeconomic and financial regime, rising US Treasury yields during Federal Reserve tightening cycles reflected higher real rates and widening interest-rate differentials in favor of the United States. This attracted capital inflows and supported dollar appreciation.

As shown in the chart, this relationship has weakened since 2022. Recent increases in long-term yields have been driven less by Fed tightening and more by inflation uncertainty, geopolitics, fiscal dynamics, and a rising term premium. Investors are demanding higher compensation for holding US debt rather than reallocating capital into dollar assets. Therefore, higher nominal yields have not translated into a stronger dollar. Instead, the dollar has weakened against major US trading partners, signaling a shift in the underlying market regime and easing global financial conditions for emerging markets. This has historically been associated with improved performance of emerging market assets, as reflected in the chart.

If this regime persists into 2026, emerging markets are likely to continue outperforming, supported by improving earnings expectations, portfolio reallocation away from US assets, and prior underallocation to EM markets. That said, both retail and institutional investors are still likely to maintain significant exposure to US assets, as the United States remains the anchor of the global financial system and a key hub for AI-driven growth.