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Emerging market ETF falls as US dollar rises and Samsung tumbles

A Samsung Galaxy Note 7
Kim Hong-Ji | Reuters

An emerging market benchmark fell sharply on Tuesday as a strong U.S. dollar and Samsung's sell-off weighed on the exchange-traded fund.

EEM dropped 2.3 percent, its worst day since September 13, when it fell 2.5 percent. Year to date, EEM has been a strong performer, adding 15 percent as investors have gravitated toward riskier assets.

A sharp decrease in shares of Samsung, the ETF's second largest holding, dragged down the fund. Samsung plunged 8 percent on Tuesday following news that it will permanently halt production of its Galaxy Note 7 amid reports that the smartphone devices have been catching on fire.

A stronger dollar, which has been supported by heightened odds of a U.S. Federal Reserve rate hike in December, also hit emerging markets.

A stronger dollar potentially hurts emerging markets in many ways.

When the dollar strengthens, any dollar-denominated debt held by companies — and countries — becomes harder to repay. There is concern, too, that a strong dollar would pressure emerging markets to weaken their currencies in order to boost exports, further compounding the debt problem. And finally, a rising dollar usually results in declining commodity prices, and many emerging-market nations are dependent on commodity exports.

Higher interest rates in the U.S. would also draw away some of the investment that had been going into emerging markets.

The South African rand was especially hard hit after news that prosecutors there issued the country's finance minister with a summons.