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As we hinted above, the US dollar is having an absolutely abysmal 2025 relative to global peers.  Paint if you will a picture: the US Dollar Index (DXY) has fallen more than 10% year-to-date, marking its worst start to a calendar year since 1973 when the Bretton Woods system collapsed and currencies began to float freely.  Think about that for a second: the greenback has not fallen this hard at the halfway point of the year since shortly after we left the gold standard. 

Multiple causes contributed to this seismic weakness in the greenback, specifically tariff uncertainty, fiscal deficit concerns, and policy divergence (differing central bank policy rates):

Tariff Uncertainty: The threat of unilateral tariffs and the likely reality of an average tariff rate higher than we’ve seen over the past 50-75 years has added political risk to the dollar

Fiscal Deficit Concerns: The passage of President Donald Trump’s signature legislation is expected to grow the US deficit significantly (the non-partisan Yale Budget Lab cost estimate is $3.7 trillion over the next 10 years, and $16.1 trillion from 2025-2055)

Policy Divergence: the differing interest rate regimes of the European Central Bank, the Bank of Japan, and Bank of England, and the US Federal Reserve have presented another headwind to the US dollar due to interest rate parity dynamics

The impacts of a weaker dollar, however, are not all negative. A weaker dollar makes US goods and services relatively more affordable to the global marketplace, providing a tailwind to US multinationals with significant export exposure (consider it roughly similar to a 10% sale tag on all things “Made in the USA”).  Dollar weakness also broadly supports international equities (both developed and emerging) and commodity prices; the year-to-date outperformance of the MSCI EAFE relative to domestic equity markets partly reflects this relationship.  Further, some of the current headwinds to the US dollar are temporary in nature, such as the different central bank policy rates discussed above, and subject to course correction.

Looking Forward

The JWM Investment Team is encouraged that (while we didn’t necessarily anticipate the speed and depth of USD weakness) we correctly forecast at the start of the year the potential for a materially structurally weaker dollar, over the near- to intermediate-term.  In addition to the relative valuation discount international equities provide relative to domestic markets, the tailwind of a weaker dollar to our international allocation was a second significant catalyst we identified as a reasonable justification to increase our international equity and fixed income allocations.  Further, we have identified and implemented hedging investment vehicles across both fixed income and equity asset classes that seek to mitigate systematic risk (think of this in terms of Beta). 

In closing, when you occasionally hear the JWM Investment Team say that we’ve positioned client portfolios for volatility, such as the spike seen in April 2025, while maintaining your upside return potential (e.g., risk-adjusted returns), kindly trust that we do not take our mandate lightly.