While the strong dollar was associated with robust growth earlier in the year, now it risks becoming more related to policy hawkishness or high inflation, said Trivedi, head of global currencies, rates and emerging market strategy research at Goldman. That mix represents a whole new challenge to emerging markets.

“If we do see that kind of more malign or more sinister dollar strength, you will see more weakness in the most fragile parts of the world,” Trivedi said in a phone interview. “It tends to be more emerging markets where the sensitivity is pretty high to dollar strength and that can then very quickly affect domestic policy settings.”

Trivedi said countries including Indonesia, South Korea and China may come under greater pressure, but that the impact would be felt broadly, citing last week’s rate decisions in Mexico and Brazil. Mexico left rates on hold, while Brazil slowed the pace of its easing cycle to a quarter point.

“Both countries have arguably taken more hawkish steps in response to the global macro and markets backdrop,” than their domestic situation required, Trivedi said.

Markets are now eager to see the US inflation report on Wednesday to guide their expectations on when the Federal Reserve will begin reducing rates. Traders are pricing in a rate cut by November, while earlier in the year they saw as many as six this year. The delay to monetary easing has supported the dollar and is weighing on other central banks, where they have to consider helping economy by lowering rates or defending the currency with a tighter monetary stance. 

The inflation report is “likely to determine the direction of travel for the dollar and a lot of currencies against the dollar. Our baseline expectation, however, is that as we go through the coming months, we will see the ECB and the Bank of England cut rates earlier and perhaps more than the Fed and that should keep the dollar at stronger levels for longer,” he said. “Dollar strength is going to be eroded only very slowly.”