Monthly Market Playbook: How investors can position for U.S. dollar weakness

Key Insights

The U.S. dollar has depreciated significantly against other major currencies since early 2025. There are a number of reasons to expect this trend to continue.
Although non-U.S. stocks have tended to outperform in past periods of dollar decline, the relationship has been stronger for non-U.S. bonds.
Investors may want to consider shifting their fixed income allocations toward non-U.S. investment-grade bonds and local currency emerging market bonds.

After more than 16 years of appreciation, the U.S. dollar has fallen sharply in recent months. As of late September, the U.S. Dollar Index (DXY), which measures the dollar’s value relative to a basket of six other major currencies, was down more than 10% since mid-January.

There are a number of reasons to expect the U.S. dollar to depreciate further. These include:

Monetary policy divergence: The U.S. Federal Reserve recently began cutting interest rates, while most other central banks have reached the end of their cutting cycles or are close to it. Narrower global rate differentials could dampen the demand for dollars.
Doubts about Fed independence: If investors believe the Fed will cut rates too aggressively due to political pressure from U.S. President Donald Trump, 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 debt crisis that would cause the dollar to weaken dramatically.
Declining foreign demand: The Trump administration’s confrontational stands on trade and foreign policy have dampened the willingness of foreign entities to own U.S. assets—particularly U.S. Treasuries.

How could investors adjust their portfolios?

Given the forces working against the U.S. currency, investors may want to consider adjusting their portfolios—particularly their fixed income allocations—to position for further dollar weakness.

One option is to shift some of their equity exposure to non-U.S. stocks, which tend to gain value in dollar terms when the dollar depreciates against their home currencies.

The relationship between stock returns and the U.S. dollar has been noisy

(Fig. 1) 12-month relative stock returns 1 versus change in the U.S. Dollar Index

Monthly data points, January 31, 1991, through August 31, 2025.
Past performance is not a guarantee or a reliable indicator of future results.
Sources: Bloomberg Finance L.P., MSCI, and FTSE/Russell (see Additional Disclosures).
¹Relative equity returns = MSCI All Country World ex U.S. Index minus the Russell 3000 Index.

Historically, non-U.S. stocks have tended to do better when the dollar was declining (Figure 1). But the relationship has been weak—as indicated by a modest 0.127 value for R², a test of statistical significance. That’s because other factors can offset the currency effect on stock prices. For example, many non-U.S. companies now generate significant sales inside the U.S., so their earnings can suffer if dollar depreciation reduces the value of those revenues.

Non-U.S. bonds could be a better option

Relative returns on non-U.S. investment-grade (IG) bonds with unhedged foreign currency exposure show a stronger historical relationship with the DXY (Figure 2). Unlike stocks, there are relatively few external factors that could impact returns. Interest rates also tend to move somewhat in the same direction globally, particularly in the developed markets.

Relative returns on IG bonds have been more highly correlated with the U.S. dollar

(Fig. 2) 12-month relative bond returns 1 versus monthly change in the DXY

Monthly data points, January 31, 1991, through August 31, 2025.
Past performance is not a guarantee or a reliable indicator of future results.
Source: Bloomberg Finance L.P. Data analysis by T. Rowe Price.
¹Relative IG bond returns = Bloomberg Global Aggregate ex USD Bond Index minus the Bloomberg
U.S. Aggregate Bond Index.

Investors also could consider shifting some exposure from U.S. IG bonds to emerging markets (EM) local currency bonds, although their relationship with the dollar has been noisier than for developed IG bonds (Figure 3). This is because EM currencies and bonds tend to have more significant differences at the country level.

Other factors can influence relative returns on EM local currency bonds

(Fig. 3) 12-month relative EM local currency bond returns1 versus the DXY

Monthly data points, December 31, 2003, through August 31, 2025.
Past performance is not a guarantee or a reliable indicator of future results.
Sources: Bloomberg Finance L.P., J.P. Morgan (see Additional Disclosures). Data analysis by T. Rowe Price.
¹ Relative local currency EM bond returns = J.P. Morgan GBI EM Global Diversified Index minus
Bloomberg U.S. Aggregate Bond Index.

However, EM local bonds now may offer more attractive opportunities to benefit from U.S. dollar weakness because EM currencies were hurt more by the dollar’s strength over the previous 16 years, leaving many of them significantly undervalued.

Conclusion

Given the potential for continued U.S. dollar declines, 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.

The T. Rowe Price Asset Allocation Committee currently maintains a neutral weight in U.S. stocks versus bonds despite elevated valuations. However, we will continue to keep a close eye on the underlying fundamentals.

Timothy C. Murray, CFA Capital Markets Strategist

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Risks: International investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as specific country, regional, and economic developments. These risks are generally greater for investments in emerging markets.

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