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To say markets are on a roll would be an understatement. Both equities and bonds have continued to storm higher with nearly no resistance since mid-April. Since January, international equities have significantly outperformed their U.S. counterparts and are on pace for their largest annual outperformance since 2006! This is a breath of fresh air for diversified portfolios, as international equities and bonds are both on pace for one of their best years since 2000!
Many are surprised by the success of international markets this year since for much of the past decade, it has been the U.S., specifically the S&P 500, leading the way, largely on the back of the MAG7.
Much of this can be attributed to the decline in the U.S. dollar in 2025. This commentary will explain why this is occurring and whether it’s a temporary blip on the radar or a sign of things to come.
U.S. Dollar
The U.S. dollar has been the world’s reserve currency for a little over a century, overtaking the British pound after World War I. For U.S. consumers, a strong dollar helps reduce the cost of imports and makes traveling abroad more affordable.
This, in turn, helps keep inflation in check, which is a welcome outcome. The downside is that an extremely strong dollar makes it harder for U.S. businesses to compete as their products become more expensive to import, which can take a toll on American manufacturers and farmers.
Historically, the dollar strengthens when U.S. Treasury yields rise. We’ve experienced the inverse for much of the year as the dollar weakened while interest rates remained elevated. Much of this can be attributed to the administration’s trade policy, as the consensus is that tariffs lead to higher prices and subsequent inflation.
While it’s too soon to draw any concrete conclusions, prices have been trending higher lately, and concerns persist that U.S. inflation will remain elevated on a relative basis. As seen below, the rate of inflation in the U.S. (~3%) is far higher than in many other developed countries.
China: -0.4%
Canada: 1.9%
Euro Zone: 2%
India: 2.07%
Source: Trading Economics.
Typically, slower growth prospects lead to aggressive Federal Reserve monetary policy (i.e., interest rate cuts), but that hasn’t happened as U.S. interest rates remain elevated compared to their foreign counterparts. The Fed recently announced its first quarter-basis-point rate cut of the year, and while the dollar has weakened relative to other currencies, it remains elevated, as seen on the chart below. This means it could slide further if uncertainty lingers.
Concerns are mounting around the U.S. national debt ($37 trillion and counting), the geopolitical climate, trade policies, prospects for slower economic growth, and the rise of alternative currencies (both foreign and crypto) that could eventually supplant the U.S. dollar. Coupled with Europe’s improving longer-term economic growth outlook, some fear that the dollar’s days are numbered.
While these are legitimate concerns, most are not new and tend to resurface during periods of uncertainty. In the ’90s, talks of the Japanese yen supplanting the dollar came and went. Then came the predictions in the mid-2000s that the euro would overtake the dollar, which didn’t happen. The recent emergence of cryptocurrencies has led many to predict that it will supplant the dollar in the coming decade. How it shakes out remains to be seen, but the dollar has been through many battles and has come out on the other side.
There’s no denying that the risks are mounting, but no other currency currently provides the same level of liquidity and stability as the dollar. This, however, opens the door for foreign markets to continue gaining further market share relative to the U.S.
FOREIGN EQUITIES
Coming into the year, international equities (Europe and emerging markets) were extremely under-owned, as shown on the chart below.
What this illustrates is that with any bit of positive news, international equities were poised to rally. This shouldn’t be a total shock given how well U.S. equities have performed for much of the past decade. The sharp depreciation of the dollar partially explains why European and emerging market equities have outperformed so far this year.
There is reason to believe this could continue, as one of President Trump’s goals is to bring manufacturing jobs back to the U.S. A weaker dollar would help make our goods and services more competitive from a cost perspective on the global stage. While it has the potential to create more jobs, it would further weaken the dollar relative to many other currencies.
While it’s too soon to draw any concrete conclusions, it seems reasonable to assume there will continue to be volatility in the various currencies until we get a more concrete picture over the coming quarters. Remember, market movements are generally based on several factors, not just one, so while it can be tempting to try to connect the dots based on one data point, it generally never works that way.
Feel free to discuss your situation with our financial planning firm.
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