The US dollar’s decline in 2025 combined with relative lower debt levels could contribute to the economic and financial emancipation of EM countries over the coming years, say Ostrum AM’s experts.

With American hegemony increasingly being challenged by China, there’s a growing sense that President Donald Trump's return to the White House has accelerated a reshaping of the world order. Certainly, questions have arisen following the depreciation of the US dollar – a durable symbol of this hegemony – coupled with the search of international diversification out of US assets¹ since the implementation of the Trump administration's fiscal, budgetary and trade policies in 2025.

How sustainable is the status of the US dollar as the reference currency and a risk-free asset, given both have been under question in 2025? And what will be the lasting impact of Trump’s tariff policy, given that US public deficit is nearly 7%² and there are widespread expectations of a slowdown in US growth³?

Clothilde Malaussène, Senior Portfolio Manager, Emerging Debt and FX at Ostrum Asset Management, says: “With US growth slowing and the Fed cutting interest rates, the growth differential and the interest rate differential with the rest of the world should continue to narrow, providing less support for the dollar. US tariff policy and the great uncertainty over the final impact on US growth is also having a negative impact on the dollar.

“Official institutions, notably Asian central banks, are diversifying their assets. As for private investors, they are rotating their asset allocation from the US to Europe; they are also increasing the hedge ratio on their USD holdings, which is historically low. This de-dollarisation, if it continues, should benefit emerging currencies and all emerging assets.”

Central banks keen to break free from the constraints of the dollar are turning to another asset: gold.

“Central bank direct holdings of gold now exceed those of US Treasuries for the first time”, observes Zouhoure Bousbih, Ostrum AM’s Emerging Market Strategist. “The high liquidity of gold, the only asset that is not subject to international sanctions, gives central banks greater leeway in their policy, regardless of the dollar fluctuations.”

In tandem with the de-dollarisation effect, trade transactions and foreign direct investment (FDI) within the bloc of emerging countries (EM) are intensifying. Moreover, FDIs between Western countries and emerging countries have fallen to $435 billion in 2023 – its lowest level since 2005⁴.

“Intra emerging market trade has been rising,” says Rushil Khanna, Ostrum AM’s Head of Equities for APAC. “And I only see that continuing, especially when you consider that 20% of global oil trade is now in non-USD. You're also seeing within Asia the cross-border Yuan transactions have started to increase.”

In 2024, the share of cross-border payments in yuan for goods trade reached 30% according to the governor of the PBoC. Zouhoure adds: “Moreover, the shift towards Africa, where Chinese exports growth exceeds that with other regions in 2025, is expected to accelerate the internationalization of the yuan.”

At the heart of the energy and digital transition

Semiconductors are also never far from the conversation around trade tensions. Technology, the cornerstone of the digital transition, is a major economic and strategic issue for both the US and China. 

China has succeeded in making itself indispensable to its trading partners, largely through its quasi-monopoly in the extraction and refining of rare earths, solar panels, electric vehicles, batteries, and has subsequently moved up the value chain. And China refuses to be confined upstream in this industry, where added value is lowest.

Rushil thinks Taiwan (with TSMC semiconductors) and South Korea are also very well positioned to capitalise on the development of artificial intelligence (AI), data centres, electric vehicles, batteries and energy storage.

He explains: “A lot of the artificial intelligence supply chain actually sits in Taiwan and South Korea, whether it's TSMC or whether it's making the foundries of these chips or whether it's making the batteries. China and BYD are market leaders in that, feeding into the whole electric vehicle supply chain. A lot of the battery storage solutions which the world need are being made in Asia. 

“As the demand for energy increases with AI taking more centre stage, this is a long structural story. So much energy goes into these servers that you need cooling systems. A lot of the liquid cooling technology sits in Taiwan.”

China’s chipmakers are seeking to triple the country’s total output of artificial intelligence processors next year⁵. And, not content with its dominant position in rare earth extraction and refining, China is continuing to secure its global mineral supplies by signing contracts with producing countries in Africa⁶ and Latin America^7.

In many ways, the country that controls rare earths becomes indispensable in the digital, energy and environmental transition.

As Zouhoure puts it: “The soils of many emerging countries are rich in rare earths such as nickel, cobalt and lithium, which are critical materials for emerging technologies and can attract foreign investment by relocating part of their production to these countries and stimulating domestic activity. The restriction of access to rare earths can be used by China as a negotiating lever or a retaliatory measure, as was the case when the US announced an increase in tariffs on China.”

Moreover, although fossil fuels are destined to decline, they remain essential to the success of what is undeniably an energy-intensive transition. Indeed, the energy transition is part of a virtuous cycle for China: with the energy mix increasingly made up of renewable energy, and increasing investment in nuclear power, China is gaining energy independence and becoming less reliant on the dollar, thereby protecting itself against potential oil shocks. And the less oil imported from Saudi Arabia, the less petrodollars are invested by Saudi Arabia in US Treasuries.

India, meanwhile, is making the same bet by investing heavily in renewable energies. Rushil adds: “India wants to be generating 75% of its energy from renewable sources in the next couple of decades. Huge investments in energy infrastructure are going on in that space.”

Debt, development and the dollar

The GDP growth in absolute levels among certain emerging markets is impressive – specifically China, the largest economy in the world after the US^8,9, and India¹⁰. However, if we consider GDP per capita, which is an indicator of development, EM has for a long time lagged developed countries, largely due to the demographic disadvantage – particularly in the case of China.

 With the exception of China, whose ageing population can be interpreted as an advanced sign of development, the population growth of many emerging countries such as Vietnam, Indonesia, Cambodia, Laos serves as a support factor for their economic growth.

The technology sector, riding the wave of the digital revolution, can also contribute to increasing the productivity of emerging countries.

“India is where China was around 15 years ago in terms of its development,” says Rushil. “If you look at Indian GDP per capita, it is about 2,500 US dollars, at the moment – or it was at the end of 2022 – and we expect it to get to 5,000 by 2030. So that's double today’s GDP per capita – an increase that would have major consequences in terms of living standards, health, education, consumption, retirement, poverty rates, and so on.”

While each EM country will always have its own specific characteristics, what unites them is their desire to break free from the dollar. The dollar’s hold continues to be a noose around their economic policy, trapping them in a relationship of dependency. Any rise in US interest rates and appreciation of the dollar automatically increases the cost of EM countries' debt. So, the burning question is, are things set to change?

“Although their debt levels have risen since the Covid crisis, they are still much lower than those of developed market countries,” says Brigitte Le Bris, Head of Global Fixed Income, EM and FX. “Above all, their debt is increasingly denominated in local currencies and much less in dollars. This reduced dependence on the dollar enables them to better withstand potential exogenous crises. For example, the recent sell-off linked to President Trump's announcement of customs duties was limited and, above all, very short-lived.”

Sébastien Thénard, Senior Portfolio Manager, Emerging Debt at Ostrum Asset Management, adds: “The central banks of these countries have, for most of them, followed an orthodox policy, thereby combating inflation and creating a virtuous circle: increasing foreign exchange reserves, reducing current account deficits and thus strengthening currencies. This is especially true for the ratio EM FX reserves to short term external debt.

“Most EM countries enjoy a very comfortable situation and a very solid buffer there. All this, coupled with attractive growth rates, has helped to improve the risk metrics of these countries and thus reduce credit spreads.”

Arguably it is the combination of all these factors – the depreciation of the US dollar, strategic policies by China and India, and increased trade within emerging regions – that are signalling a potential decline in dollar dominance. The cumulative effect is allowing EM countries to continue to seek a path towards greater economic independence.

Yet it’s unclear the extent to which EM can be pivotal in balancing global economic power, fostering resilience against crises, and redefining financial dependencies.

Written in August 2025