In 1971, Treasury Secretary John Connally made the now famous remark that the US dollar was “Our currency, but your problem.” At the time, the comment captured the reality that Washington managed the dollar with an eye toward domestic economic conditions rather than its role as the world’s dominant reserve and trade currency. The implication was that global partners had little choice but to adjust around US monetary and fiscal priorities. Half a century later, however, the dynamics surrounding the dollar appear to be shifting, with meaningful implications for equity investors at home and abroad.
The Trump administration has repeatedly underscored concerns about currency manipulation and the persistent US trade deficit. A central theme has been the desire to boost American exports, and in practical terms, the most direct path to doing so is through a weaker dollar. While policy pronouncements alone do not guarantee currency outcomes, the rhetoric coming from Washington has contributed to a market narrative that dollar strength is no longer a policy priority. Instead, investors are grappling with the prospect that the US may be comfortable allowing — or even encouraging — dollar depreciation.
Traditionally, the dollar has served as a safe-haven asset, strengthening during periods of financial stress as global investors sought refuge in the perceived security of US markets. Over the past decade, this relationship has been remarkably consistent: in 57 instances when the S&P 500 Index declined by more than 1%, the dollar strengthened by at least 0.5%. By contrast, there were only 13 occasions when equities fell by more than 1% and the dollar also weakened by at least 0.5%. What is striking is that nearly half of those exceptions — six out of 13 — have occurred in 2025 alone.1 This suggests a possible breakdown in the safe-haven behavior that has underpinned global portfolio construction for years.
The Bloomberg Dollar Index has fallen close to 9% year-to-date, underscoring the scale of the move. For European investors, the implications are particularly acute. While the S&P 500 in local dollar terms has delivered modest gains, in euro terms the index is roughly flat, leaving investors overexposed to US equities trailing their counterparts who remained focused on home markets. This has reinforced the relative underperformance of dollar assets in international portfolios.
Looking ahead, we expect dollar weakness to remain a central theme. With the Federal Reserve embarking on rate cuts, the relative yield advantage of holding US cash has diminished. As interest rate differentials compress, foreign investors are less incentivized to maintain large dollar holdings, reducing a key support for the currency. The combination of softer policy, political tolerance for a weaker exchange rate and shifting capital flows creates a backdrop where additional depreciation looks likely.
At the same time, valuation differentials between US and international equities are difficult to ignore. On a relative basis, international equities are trading at nearly a 30% discount to US peers, close to the cheapest levels observed in the past two decades. In other words, investors are being paid to diversify abroad just as the dollar’s longstanding dominance as a portfolio stabilizer is being called into question.
Important Disclosures & Definitions
1 Source: Bloomberg, 08/31/2015 - 08/31/2025
Forward Price/Earnings (P/E) Ratio: a stock valuation metric that compares a company’s share price to its projected future earnings.
MSCI World ex USA Investable Market Index (IMI): captures large, mid and small cap representation across 22 of 23 Developed Markets countries, excluding the US.
S&P 500 Index: widely regarded as the best single gauge of large-cap US equities. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
One may not invest directly in an index.
AAI001000 09/23/2026