The ICE U.S. Dollar Index (DXY), which tracks the performance of the U.S. dollar (USD) against a group of other currencies, has decreased by about 9% since the beginning of the year. This development accompanied a sharp deterioration in prevailing market sentiment and a shift away from USD-denominated assets, primarily influenced by increased uncertainty regarding the economic and geopolitical repercussions of U.S. trade policy.
The weaker dollar has been a significant driver of the year-to-date outperformance of international equities relative to the United States. In general, a falling dollar provides a tailwind for U.S. investors in international equities, as it increases the value of international investments when converted back into USD. The reverse is true as the dollar strengthens, as it has for much of the past 20 years, weighing on international investment returns.
The value of the dollar has fluctuated notably over time, as shown in the chart above. The USD rose about 50% from 2010 to the peak in 2022, as U.S. business dynamism and “exceptionalism” themes took hold. The recent retracement, while material, has been minor relative to this longer-term trend. However, whether this represents the start of a longer-term period of dollar weakness remains to be seen. If the dollar falls further in the months ahead, it will continue to provide a boost to international equity returns for U.S.-based investors and could enhance profitability for U.S.-based companies with a significant international presence.
The outlook for international equities from here remains uncertain. However, recent shifts in global sentiment and geopolitics, and their impact on equity and currency markets, have highlighted the diversification benefits of international assets and the importance of maintaining international exposure within a diversified equity portfolio.
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Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.
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