The Weakening U.S. Dollar

The U.S. dollar has declined over 11% over the past year, touching multi-year lows against a basket of major currencies. For U.S. investors holding unhedged international positions, dollar weakness is a direct return enhancer — a 10% gain in a foreign equity market becomes a 21% gain in dollar terms if the dollar falls 10% simultaneously. Conversely, investors who have avoided international allocation are now sitting on a compounding currency headwind relative to globally diversified peers.

The dollar's weakness reflects a confluence of structural pressures: rising U.S. fiscal deficits reducing confidence in dollar-denominated assets, tariff uncertainty disrupting global trade flows that historically supported dollar demand, and a deliberate reallocation by foreign central banks and sovereign wealth funds away from U.S. assets. The 'Sell America' dynamic — simultaneous selling of U.S. equities, bonds, and the dollar — has accelerated the move.

Emerging markets have been the primary beneficiary. The MSCI Emerging Markets Index posted its strongest start in years in early 2026, adding roughly $1 trillion in market cap in a matter of weeks, with local-currency bond inflows reaching their highest levels since the late 2010s. European equities have also outperformed meaningfully on a dollar-adjusted basis, and Japanese equities have attracted significant foreign inflows as the yen strengthens.

The answer depends on the directional view on the dollar. If dollar weakness is expected to persist, unhedged international positions capture the currency tailwind on top of local equity returns. If the dollar is expected to stabilize or recover, currency-hedged ETFs isolate the equity return without the currency volatility. Many advisors are splitting the difference — maintaining a core hedged international allocation while adding a smaller unhedged sleeve to capture potential continued dollar weakness.

U.S. investors allocate roughly 60-70% of their equity portfolios to U.S. stocks despite the U.S. representing approximately 60% of global market cap — meaning many portfolios are meaningfully overweight domestic equities relative to global benchmarks. With international markets outperforming on a dollar-adjusted basis and valuations in developed and emerging markets trading at significant discounts to U.S. equities, the opportunity cost of home-country bias has rarely been higher.