The Impact of Dollar Volatility on Emerging Asia's 2026 Growth Outlook

The U.S. dollar's volatility in late 2025 has cast a long shadow over emerging Asia's economic prospects for 2026. A weaker greenback, driven by expectations of U.S. rate cuts and shifting global capital flows, has created both headwinds and tailwinds for the region. While the dollar's decline has bolstered export competitiveness and capital inflows, it has also exposed vulnerabilities in trade tensions and domestic policy missteps. Meanwhile, AI-driven capital flows are reshaping equity opportunities, with emerging Asia at the epicenter of a technological and economic renaissance.

Dollar Weakness and the EM Boon

The U.S. dollar's retreat in 2025 has been a double-edged sword for emerging Asia. According to a report by the IMF, global growth remains "tenuously resilient" at 3.0% in 2025 and 3.1% in 2026, but the agency's analysis stops short of addressing dollar volatility's regional impacts. However, data from Q3 2025 reveals that a weaker dollar has broadly benefited emerging markets by enhancing export competitiveness and attracting capital inflows. For instance, India's rupee appreciated 4% against the dollar in the past quarter, while Indonesia's rupiah and Vietnam's dong saw similar gains, albeit with domestic policy challenges tempering their trajectories according to Reuters.

This dollar weakness is partly attributable to the Federal Reserve's anticipated rate cuts, which have spurred investors to reallocate funds into higher-yielding emerging market assets. Asian central banks, meanwhile, have continued easing monetary policy, further amplifying the region's appeal. As stated by JPMorgan's 2026 Asia Outlook, "the combination of dollar weakness and central bank easing has created a favorable macroeconomic backdrop for EM Asia."

AI-Driven Capital Flows: A New Engine for Growth

The interplay between dollar weakness and AI-driven capital flows is redefining equity opportunities in emerging Asia. According to a report by SSGA, AI-related themes have contributed more than half of the year-to-date returns for emerging market equities in 2025. This trend is set to accelerate in 2026, as AI infrastructure and applications become central to global supply chains.

China, Taiwan, and South Korea are leading the charge. China's AI resurgence, fueled by advancements in large language models and cloud infrastructure, has driven equity gains in sectors like semiconductors and data centers according to SSGA. Taiwan, the world's largest contract chipmaker, has seen its IT sector flourish as demand for AI chips surges, with companies like TSMC benefiting from a 20% revenue increase in Q3 2025 according to SSGA. South Korea, a key producer of high-bandwidth memory (HBM) for AI applications, is investing heavily in data centers, with SK Hynix and Samsung Electronics poised to capture a significant share of the AI hardware boom according to SSGA.

India, though late to the AI hardware game, is leveraging its strengths in software and services. The country's IT sector, already a global leader, is expanding into AI-driven solutions for healthcare, finance, and logistics. Goldman Sachs Research forecasts that emerging-market stocks could return roughly 16% in 2026, with India's non-tech sectors-such as consumer goods and infrastructure-offering compelling diversification opportunities.