How investors can position for U.S. dollar weakness

The U.S. dollar has fallen significantly against other major currencies since early 2025, and there are many reasons to believe that trend could continue.

Investors may want to consider adjusting their portfolios—particularly their fixed income allocations—to account for dollar weakness.

After more than 16 years of appreciation, the strength of the U.S. dollar is now in question.

As of late September, the DXY—an index that measures the dollar’s value relative to a basket of six other major world currencies—had depreciated by more than 10% since mid-January. 

However, the currency remained relatively expensive by historical standards, up 37% since its post-financial crisis low point in March of 2008.

There are a number of reasons to expect U.S. dollar weakness to continue. These include:

Monetary policy divergence. The U.S. Federal Reserve recently began cutting interest rates, while most other central banks have stopped cutting or are near the end of their cutting cycles.  This means the interest rate differential between the U.S. and the rest of the world are narrowing, which tends to dampen the demand for dollars.

Doubts about Fed independence. U.S. President Trump has taken an increasingly confrontational stance to try to force the Fed to cut rates even though inflation remains elevated.  If investors believe the Fed will not keep inflation in check due to political pressure, the dollar is likely to suffer.

Giant U.S. budget deficits. The U.S. government continues to spend significantly more than it collects in taxes.  This ultimately could lead to a sovereign debt crisis that would cause the currency to weaken dramatically.  

Declining foreign demand. Foreign investors—both public and private—have been willing to hold dollars due to the strength of U.S. companies and because the dollar has been the world’s primary reserve currency.  But the Trump administration’s confrontational stands on trade and foreign policy have dampened the willingness of foreigners to own U.S. assets (particularly U.S. Treasuries).

Given the risk of further dollar weakness, we think investors may want to consider positioning their portfolios accordingly.  

One option is to shift exposure from U.S. to non-U.S. stocks. Non-U.S. stocks typically are priced in local currencies and thus tend to gain value in dollar terms when the dollar depreciates against those currencies.

However, this impact can be diluted by several factors.  Notably, many non-U.S. companies now generate significant revenues from sales inside the U.S.  Not only are these firms facing tariff headwinds, but their earnings also could suffer if the dollar weakens further against their home currencies.

If we look at the historical returns on non-U.S. stocks relative to U.S. stocks, we see that non-U.S. stocks indeed tended to do better when the dollar was weakening. But the relationship has been weak—as indicated by a modest 0.127 R-squared, a test of statistical significance.

Investors still may have good reasons to tilt toward non-U.S. stocks, as valuations are notably cheaper outside the U.S. But doing it solely because they expect the dollar to weaken further might not be prudent.

Looking at historical relative returns on non-U.S. investment-grade, or IG, bonds (with the foreign currency exposure on non-U.S. bonds unhedged), we see a very strong relationship with the DXY. Correlation and R-squared are both highly significant.  

This is because there are relatively few external factors that could impact returns (unlike stocks). Interest rates also tend to move somewhat in the same direction globally, particularly in the developed markets.

Investors also could consider shifting some exposure from U.S. IG bonds to emerging markets bonds denominated in local currencies.  

The historical correlation of relative returns with the DXY is still significant, although the R-squared indicates a noisier relationship.  This is because EM currencies and bonds tend to have more significant differences at the country level, including credit quality.  

However, EM local bonds may offer more significant opportunities to benefit from U.S. dollar weakness because EM currencies have been hurt more by dollar strength. Over the 10 years ended September 29, the J.P. Morgan EM Currency Index lost almost one-third of its value in dollar terms. Over the same period, the Japanese yen fell just 20% and the euro actually appreciated 4%.

Given the potential for continued U.S. dollar weakness, we think U.S. investors may want to consider adjusting their portfolios to increase exposure to other currencies.

Reflecting this view, the T. Rowe Price Asset Allocation Committee currently maintains overweight positions in both non-U.S. IG bonds and EM local currency bonds.