Amidst all this noise, U.S. markets have not been able to maintain the resilience they showed at the start of the year. The S&P 500 is now down –3.6% year‑to‑date, and the Nasdaq Composite has fallen even further, slipping –5.9% as investors rotate out of high‑growth names and reassess risk across the tech sector. The dollar, meanwhile, has strengthened sharply and, along with gold, has been a big beneficiary of the volatility, to hedge against the deepening uncertainty.
Emerging markets are telling a very different story. FPIs have been selling heavily throughout 2026, and India — one of the easiest markets to track for foreign flows — has already seen over ₹66,000 crore in outflows this year. The selling has picked up sharply in March, making it the worst month so far, as global investors react to the Iran conflict, higher oil prices, and a stronger U.S. dollar.
The rupee has weakened during this period, which makes Indian assets even less attractive to foreign investors. Domestic investors have stepped in to limit the damage, but the scale of FPI withdrawals shows how quickly global risk sentiment can turn against emerging markets. It’s a clear reminder that when the U.S. becomes unstable, the impact spreads fast — and emerging markets feel it first.
The U.S dollar is the world’s reserve currency, the financial operating system we all run on. The dollar dominates global activity: it’s used in 88% of all foreign‑exchange transactions, makes up 58% of global central‑bank reserves, and is involved in 54% of global trade invoicing. This means that most cross-border lending, corporate debt, and global banking operations are inherently tied to the dollar's strength and supply. The staples of every country (oil, metals, shipping, and countless manufactured goods) are priced in dollars by default. Central banks also keep a large share of their emergency reserves in dollars because it’s the currency the world trusts the most when things go wrong.
The U.S’s equity and bond markets are the deepest and most liquid anywhere, and its legal and regulatory institutions are still treated as credible anchors of the system. At the top of that system sits the U.S. Treasuries, backed by the full faith and credit of the U.S. government. A U.S. default is seen as unachievable, hence why Treasuries function as the world’s risk-free benchmark.
Because the dollar is the currency the world borrows in, the Fed’s policy decisions ripple beyond U.S. borders. Even minor shifts in US interest rates shift borrowing costs worldwide, regardless of their location, in particular through dollar-denominated debt held by companies and governments. Hence, when the U.S. becomes the centre of geopolitical instability, the world, unfortunately, cannot ignore it; it must recalibrate around it, as the financial architecture is deeply intertwined with the dollar.
Emerging markets are structurally more sensitive to global shocks. Their currencies are weaker and more volatile, their markets are smaller, and they rely more heavily on foreign capital. Most critically, many EM borrowers carry their debt (sovereign and corporate) in dollars. India is a clear example: FPIs (Foreign Portfolio Investments) hold a large share of Indian equities, and the U.S. alone accounts for a significant portion of those holdings. When global risk perception shifts, FPIs withdraw quickly, pushing down the Nifty, the Sensex, and the rupee.
A strong dollar and rising U.S. yields make emerging markets less attractive. The rupee weakens faster during global stress, and India’s high equity‑market premium makes it even more vulnerable, as foreign investors tend to pull back from the most expensive emerging markets first. Domestic investors stepped in aggressively to prevent a deeper slide, but the outflows remained heavy.
When geopolitical tension rises, investors exit risky assets, currencies weaken, and capital flows reverse. Safe‑haven assets, such as dollars, Treasuries, gold, and even the Swiss franc, benefit. Emerging markets feel the pressure first because their financial systems are more exposed to shifts in global liquidity and sentiment.
2026 overall is showing us how quickly U.S. political and geopolitical actions can reshape global markets. The U.S. remains the centre of the financial system, and as long as that remains true, instability in Washington will continue to echo through emerging markets, long before it reaches Wall Street. However, when the U.S starts acting too recklessly and unpredictably, investors resort to other markets.
Nonetheless, investors are pulling money cautiously, temporarily relocating. However, this is not permanent – the biggest, strongest companies in the world (Microsoft, Nvidia, Amazon, Google and so on) are still American, and investors need exposure to them. The concentration of innovation and market-leading enterprise value in the U.S. acts as a powerful gravitational force. So even if the U.S. feels risky, investors won’t dump everything, as that would be the equivalent of selling your house because it rained.
As investors navigate through challenges, they will mostly focus on risk management by taking profits from U.S. tech, moving small portions of money into other emerging/global markets, increasing their positions in commodities and holding more cash than usual.