With a gain of 2.2% in the month of May, the US dollar index?a gauge of the greenback?s strength against a basket of six major currencies?seems poised for further appreciation. And if that happens, it could lead to further under-performance of emerging equity markets (EMs) vis-a-vis that of developed market (DMs), finds FE study.

Historically, the dollar index and the relative movements of benchmark equity indices of emerging and developed markets have had a strong correlation.

During the phases when the dollar index weakened substantially, the returns provided by the emerging equity markets outdid that of developed markets by a huge difference ranging from 17% to 50%.

However, during the periods when the dollar index strengthened more than 10%, such huge out-performance gap notably faded.

For example, between November 2005 and February 2008, when the dollar index depreciated by 22%, the return on MSCI EM was 50% higher than the return given by MSCI World index.

However, during the turbulent phase between June 2008 and March 2009, when the dollar index gained 23%, MSCI EM underperformed MSCI World by 5%.

This performance matrix reasserts the change in the risk appetite of investors globally based on global macro-economic situations.

The dollar index gives a fair perspective of the overall value of the dollar as opposed to that of its value against a single currency.

Moreover, the dollar being a safe haven choice amongst investors in the time of uncertainty, a directional change in its value highlights the investor risk taking appetite at that juncture, which in turn could decide fund allocation across assets and regional equity markets.

After falling as low as 72.93 at the end of April 2011, the dollar index is currently hovering around 74.40 mark; its gain primarily stimulated by the declining Euro following the re-emerged debt concerns in the Euro region.A sustained recovery in the US economy along with a worsening debt crisis in Eurozone could accentuate the dollar index?s gain, feel experts. Consequently, EMs may prolong their relative under-performance to the developed market given, that historically a rising dollar index is generally accompanied by a drop in the relative out-performance of the EMs against the DMs . In 2011 so far, MSCI EM has gained 1% compared to a 4% return given by MSCI world.