Retirement Planning, Working With an Advisor

When the Dollar Weakens: What It Could Mean for Your Portfolio

by Alex Gibbs

Recent data presents an interesting economic picture that merits examination.

The U.S. Dollar Index sits around 97, down more than 10% over the past year.¹ The euro has climbed to $1.19, up nearly 15% year-over-year.³ Gold has surged past $5,000 per ounce, reflecting a 73% gain in twelve months.² Chinese regulators recently advised banks to limit U.S. Treasury holdings.⁴

These developments are occurring despite tariffs, which classical economics suggests should strengthen the dollar.

Understanding Dollar Weakness

When analysts describe “dollar weakness,” they mean the dollar buys less of other currencies than previously. A year ago, one dollar might have purchased 0.92 euros. Today, that same dollar might buy only 0.84 euros.

This can create two simultaneous effects:

For American travelers abroad, costs would increase in dollar terms. That Paris hotel became approximately 15% more expensive in dollar terms, even if the foreign price didn’t change.

For American investors holding international assets, those same assets would increase in value when converted to dollars. That European stock position? Even if the stock price in euros stayed flat, the dollar-adjusted return would reflect approximately 15% currency gain.

This is why portfolio conversations about currency differ from vacation conversations.

Why the Dollar Is Moving

In my view, the current dollar decline appears to break from some historical patterns.¹ Typically, when the U.S. implements tariffs, the dollar strengthens because import costs rise. But that’s not happening now.

Trade policy uncertainty appears to have influenced global confidence. When the effective tariff rate reaches its highest level since 1946—approximately 13.5% weighted average⁵—foreign investors may reassess U.S. asset risks.

Research from major financial institutions suggests this could reflect a multi-year cyclical shift. Morgan Stanley’s analysis indicates the dollar could potentially fall toward 94 on the DXY index by mid-2026.⁶ ABN AMRO’s purchasing power parity calculations suggest the dollar may be overvalued by approximately 17% versus the euro.⁷

Cambridge Associates recommended investors “remain underweight the US dollar” in their 2026 outlook.⁸

“In 2025, international stocks returned 23.7% in local currencies. U.S. investors who held them unhedged earned 31.2%. That extra 7.5% came entirely from currency movements.”

The Portfolio Math

Here’s where dollar weakness and its portfolio impact can create tangible differences.

International stocks through an MSCI EAFE index fund returned 23.7% in local currencies during 2025. But investors who held those stocks unhedged earned 31.2% in U.S. dollar terms.⁹ That extra 7.5 percentage points came entirely from the dollar weakening.

This can catch investors by surprise. Many understand international diversification as “owning different companies.” Fewer realize it can also mean “owning assets denominated in different currencies.”

For context: roughly 40% of S&P 500 revenue comes from international operations.¹⁰ When U.S. multinationals convert foreign sales to dollars, a weaker dollar mathematically increases reported earnings.

Implications for Different Holdings

For U.S. stocks with domestic focus: Companies generating most revenue domestically often don’t benefit from currency tailwinds.

For U.S. multinationals: These companies could see earnings growth accelerate as foreign revenue converts to more dollars.

For international stocks: Holdings in developed and emerging markets can gain from both local market returns and favorable currency translation.

For international bonds: When foreign bonds pay interest in euros or yen, and those currencies strengthen against the dollar, the yield in dollar terms could rise.

For commodities and gold: Gold is priced in dollars globally, so when the dollar weakens, gold typically rises in dollar terms. Current gold prices above $5,000 could reflect this dynamic partially.²

For cash holdings: Dollars in savings accounts maintain domestic purchasing power if U.S. inflation remains stable.

These aren’t recommendations—they’re frameworks for understanding how asset classes might respond to currency movements.

The Diversification Question

Research from major financial institutions converges on a theme: international diversification has regained relevance.

After a decade where U.S. large-cap stocks outperformed virtually everything else, the valuation and currency setup has shifted. Morningstar’s research team called early 2026 “an opportune time to add more exposure to non-US markets” specifically because of currency dynamics.¹¹

In my view, this doesn’t mean abandoning U.S. holdings. It means reconsidering whether portfolios heavily tilted toward domestic assets remain appropriately balanced.

The U.S. stock market represents roughly 60% of global market capitalization.¹² Yet many American investors hold 80%, 90%, or even 100% U.S. stocks. That’s not neutral—it’s an active position that U.S. outperformance continues and currency movements remain favorable.

“Resilient portfolios aren’t built to maximize one scenario. They’re built to avoid significant underperformance in scenarios you didn’t prepare for.”

What This Doesn’t Mean

Dollar weakness doesn’t mean the U.S. economy is collapsing. GDP growth came in at 1.4% in Q4 2025 and 2.2% for the full year, employment remains positive, and corporate earnings continue to grow.¹³ Weak currency can coexist with a healthy economy.

It doesn’t mean moving all assets offshore. Currency movements are cyclical. The dollar has strengthened and weakened repeatedly throughout history.

It doesn’t mean foreign stocks are automatically better investments. Local market returns still matter more than currency effects over long periods.

It doesn’t mean this trend is permanent. Morgan Stanley’s analysis could be incorrect. Markets could shift based on Federal Reserve policy changes or economic surprises.

The point isn’t predicting currency movements. The point is understanding how different scenarios might affect different portfolio positions.

Currency Hedging Considerations

You can own international assets with or without currency exposure. Currency-hedged international funds attempt to neutralize foreign exchange effects. Unhedged funds give you both company and currency exposure.

Which is better? It depends on the currency environment.

During dollar strength, hedged funds typically outperform because they avoid currency translation losses. During dollar weakness, unhedged funds typically outperform because they capture currency translation gains.

Many investors don’t actively manage currency hedging because it requires specific beliefs about currency direction. A simpler approach to consider is maintaining diversification across both U.S. and international holdings, accepting that currency effects will sometimes help and sometimes hurt.

The Practical Question

If you’re approaching retirement or already retired, currency dynamics matter differently than for younger investors.

A 35-year-old with 30+ years until retirement can largely ignore short-term currency fluctuations. Over three decades, currency effects tend to mean-revert.

A 65-year-old beginning retirement faces different considerations. If spending from a portfolio heavily tilted toward U.S. assets during a multi-year dollar bear market, there might be opportunities for better risk-adjusted returns from international diversification.

The planning question isn’t “Will the dollar keep falling?” It’s “Does my portfolio allocation make sense across multiple possible currency scenarios?”

This is where conversations with a financial professional can become valuable—not because they can predict currency movements, but because they can help model how different portfolio structures perform under different currency assumptions.

Building Resilience

A healthy way to think about dollar weakness is as one variable among many that portfolios need to withstand.

Just as you can’t build a portfolio that only works if interest rates stay low, you can’t build one that only works if the dollar maintains current levels.

Resilient portfolios function across a range of possible scenarios:

If the dollar weakens further, some positions benefit
If the dollar stabilizes, balanced exposure continues generating appropriate returns
If the dollar strengthens again, domestic holdings provide support

This isn’t about maximizing returns in any single scenario. It’s about avoiding significant underperformance in scenarios you didn’t prepare for.

Moving Forward

If you’re wondering whether current dollar weakness should change anything about your investment approach, start with these questions:

What percentage of your portfolio holds assets denominated in foreign currencies or operated by companies with significant international revenue?
Was that allocation intentional, or did it happen by default as you accumulated U.S. index funds over time?
Does your current allocation make sense if the dollar weakens another 10–15% over the next two years? Does it still make sense if the dollar strengthens 10–15% instead?

These questions don’t lead to universal answers. A 40-year-old with concentrated U.S. equity compensation might benefit from international diversification elsewhere. A 70-year-old retiree with pension income and conservative bond holdings might need less currency exposure.

The point is making currency a conscious decision rather than an accidental outcome.

About Alex Gibbs & Measured Financial

Alex Gibbs — “As a Financial Advisor, it’s my mission to build client relationships that go beyond financial investment. I’m committed to putting clients first by building relationships and providing value from day one. It’s not an investment in securities alone—I believe it begins with an investment in trust.”

Measured Financial — “At Measured Financial, our expertise is to broaden your investment opportunities through investments not dependent on the whims of the stock market. You’re treated with a personal touch, and we strive for you to feel valued, heard, and understood every time we interact with you. We take your trust seriously. That’s why we’re straightforward, honest, and open in our communication with you.”

Ready to Take the Next Step?

If you’d like to discuss how currency dynamics might affect your specific financial plan, I’d welcome the conversation. Schedule a discussion with me here.

Sources

Advisory services are offered through Tailored Wealth Management, LLC dba Measured Financial, an Investment Advisor in the State of California.

All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication of future results. Purchases are subject to suitability. This requires a review of an investor’s objective, risk tolerance, and time horizons. Investing always involves risk and possible loss of capital.

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