Collateral damage: Dollar strength and emerging markets' growth

We document a negative relation between the strength of the U.S. dollar and emerging markets' growth: when the dollar is strong, emerging markets' real GDP growth decreases-and vice versa. The main transmission channel is through (i) an income effect owing to the impact of the dollar on global commodity prices, and (ii) capital/production-inputs imports. As the dollar strengthens, dollar-commodity prices fall, depressing domestic demand growth via lower dollar income, thus reducing emerging markets' growth. Domestic demand decelerates in countries relying on importing capital/inputs for domestic production, as their cost increases when their currencies weaken, despite any expansionary expenditure-switching effect.