I’m undertaking a 1000-day reinvention project, blogging here daily to track my progress. In Monday Money, I write about money management.
The U.S. dollar has been largely in an uptrend since the Great Financial Crisis (2007 – 2009). Last year, however, it weakened. The U.S. Dollar Index ($DXY) was down 9.9%. DXY measures the dollar aginst a basket of six major foreign currencies: Euro (EUR), Japanese Yen (JPY), British Pound (GBP), Canadian Dollar (CAD), Swedish Krona (SEK), and Swiss Franc (CHF).
International stocks, both developed markets and emerging, are on a tear. Last year, the S&P 500 increased almost 18% — an incredible return. But the MSCI Emerging Markets index was up 34% and the MSCI EAFE index (developed markets ex US/Canada) was up 32%.
If you’ve been thinking for a decade “there’s got to be a mean reversion” with international stock markets finally outperforming the United States, that time seems finally to be here. So you ought to be in international stocks, both developed and emerging markets.
But there’s another reason to tilt international: because it’s a great hedge against a weaker dollar. Cullen Roche of Discipline Funds writes:
[Foreign] diversification isn’t really a bet on foreign corporations so much as it’s a hedge against the Dollar. When the Dollar declines foreign equities have a strong tailwind and vice versa. So foreign diversification isn’t just a way to diversify away from domestic economic risk. It’s very specifically a hedge against domestic currency risk as well.
If you are worried about the Dollar then owning gold or avoiding bonds is just one way to hedge yourself. You should also be reducing exposure to domestic equities.
Is there more dollar weakness incoming? Are we entering a regime of “slow dollar down”? Some macro observers say we are.
In his predictions for 2026, Brookings Institution Senior Fellow Robin Brooks forecasts dollar weakness:
the Dollar rose massively in the decade before the COVID pandemic, powered by US outperformance vis-à-vis its G10 peers. US growth is still outperforming everyone else… but what’s different now is that the Fed is easing into this boom. That’s toxic for the Dollar, because it means that nominal (and real) rates will fall relative to the rest of the world. That’s not to say that other US assets will do badly. Low real interest rates are good for the stock market and I fully expect the S&P 500 to do well. Financial conditions will be extremely loose, which may of course be the plan into the midterm elections later this year.
Why is the Fed’s “easing into this boom” a recipe for dollar weakness? A couple reasons come to mind:
Interest rate differentials. Global investors both institutional and otherwise sometimes move money in search of higher yields. If the U.S. lowers its interest rates, the dollar becomes less attractive.
Inflation risk. When the Fed cuts rates in a boom, nominal rates go down, but inflation expectations often go up. Bondholders don’t like to hold bonds with low real yields.
About a month ago, I shared five investing moves to make now, as the dollar declines. I neglected to mention how investing internationally hedges against dollar weakness, so I’m correcting that now.
So let’s make it six investing moves to make now, as the dollar declines:
- Add precious metals
- Trim U.S. treasuries, especially those of longer duration.
- Tilt towards value stocks, both in the U.S. and otherwise.
- Reduce all bond positions in your portfolio, in the expectation of higher credit spreads.
- Investigate and consider adding liquid alts.
- Tilt towards international equities and away from U.S..