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Why the Dollar Inflection Should Not Be Ignored
March 14, 2025
Todd Speed, CFA
These are complex times in global markets. As we recently noted, the US administration is acting as a strong protagonist in the global economy, but we increasingly see the rest of the world is not standing still. Foreign equity markets are outperforming, multiple regions are boosting economic stimulus, and the US dollar is marching lower at a pace not seen in years.
How did we get here?
The US Dollar Index rallied in 2024, ultimately rising over 7% and appreciating versus every major currency pair. Dollar strength and heavily crowded positioning in currency markets may have been the ultimate expression of the widely quoted US exceptionalism that dominated asset prices since late 2022.
Turn the page to this year and almost everything is different. International stocks are markedly outperforming the S&P 500 Index, the “Mag 7” has seen a swift correction, policy uncertainty reigns, and capital is pivoting overseas.
One asset shows all these changes coming to roost—the US dollar. Since a near-term peak in early January, the dollar has been mostly on a one-way trip lower on the heels of softer US economic data, tariff conflicts, and fiscal uncertainty.
2025: International equity surge
Year-to-date through March 11, 2025
Source: Bloomberg. Past performance is no guarantee of future results.
Turning the ship: After years of US dominance, a pickup in flows into Europe
Fund flows into US and European equities (rolling three-month, $ bil)
Source: Morgan Stanley, European Equity Strategy, “Moment of Truth,” March 11, 2025. Past performance is no guarantee of future results.
The US dollar recently traded over two standard deviations above the average versus other currencies
Source: CLSA, “Top Dollar” February 20, 2025 using CLSA, Oxford Economics. Past performance is no guarantee of future results. PPP = purchasing power parity, which measures the price of a basket of goods in different currencies.
For investors, the importance of the change in the dollar cannot be overstated. After a decade-plus of secular dollar strength, we are in the midst of a major inflection. An extended period of a sideways-to-weaker dollar has historically supported higher returns in international stocks relative to US stocks and encouraged global allocation and capital flows into developed and emerging markets. Investors should take note.
Diversification and asset allocation do not guarantee a profit or protect against a loss. Alternative strategies entail added risks and may not be appropriate for all investors. Indexes are unmanaged, are not available for direct investment, and do not include fees and expenses.
Indexes are unmanaged, do not include fees or expenses, and are not available for direct investment. The US Dollar Index measures the value of the US dollar relative to a basket of foreign currencies, including Euro Area, Canada, Japan, United Kingdom, Switzerland, Australia, and Sweden. The S&P 500 Index is considered generally representative of the US large-cap stock market. The MSCI Europe Index is a measure of large cap and mid cap performance of developed markets in Europe. The MSCI China Index measures the performance of large and mid cap equities across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). The MSCI Emerging Markets Index captures large and mid cap representation across Emerging Markets countries. The index covers approximately 85% of the free float-adjusted market capitalization in each country. The Bloomberg Magnificent 7 Total Return Index is an equal-dollar weighted equity benchmark consisting of a fixed basket of 7 widely-traded companies classified in the United States and representing the Communications, Consumer Discretionary and Technology sectors as defined by Bloomberg Industry Classification System (BICS). (Sources: Bloomberg, MSCI.)
Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. The views and strategies described may not be appropriate for all investors. References to specific securities, asset classes, and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as recommendations.
As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities, including fluctuations in currency exchange rates, increased price volatility and difficulty obtaining information. In addition, emerging markets may present.
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