How are currency movements affecting international investments and what does that mean for globally diversified portfolios?

As of June 30, 2025, the U.S. Dollar Index (DXY) declined to 96.88, marking a 10.7% decline since the start of the year. The slide reflects a trend of slowing domestic growth, softening consumer sentiment, and evolving trade policy – most notably, the reintroduction of broad-based tariffs. Among these factors, tariffs have contributed most significantly, adding friction to global trade, raising costs and increasing uncertainty for multinational firms. As confidence in U.S. trade policy diminishes, some global trade partners may reduce their reliance on the dollar in cross-border transactions and shift reserves toward alternative currencies. This drop in global demand has added pressure to the dollar’s value. 

For investors with globally diversified portfolios, currency movements can influence returns. Empirical’s international investments are held in the local currency of the investment but priced in U.S. dollars. When the dollar declines, the value of foreign assets and earnings rises once translated into dollars, meaning a weaker dollar directly improves the performance of international investments. This gain occurs without added cost or operational complexity of currency hedging. 

This dynamic is illustrated in the chart below, comparing MSCI EAFE Index¹ returns in local currencies such as euros, yen and pounds, and in U.S. dollars against movements in the U.S. Dollar Index. 

As the dollar weakened the returns of the MSCI EAFE index measured in different currencies diverged, especially after tariff-related announcements in March and April. More simply, the dollar’s depreciation created a meaningful uplift in USD-based returns on foreign stocks. This dynamic contributed to stronger performance among unhedged foreign equity positions.  

However, unhedged exposure also increases portfolios’ sensitivity to currency swings. A rebound in the dollar may dampen returns on overseas holdings even if local market performance remains strong. Additionally, exchange rates tend to balance out over time, and accurately forecasting short-term moves is challenging. This supports staying invested globally rather than shifting allocations in response to near-term currency fluctuations. 

The benefits of geographic diversification go beyond currency effects. Exposure to international markets offers access to different economic cycles, monetary policies, and sector trends. While U.S. equities led for much of the past decade, leadership can shift. Maintaining broad exposure positions portfolios to participate in global growth while managing risk across evolving environments. 

The recent decline in the U.S. dollar—shaped in part by shifting trade dynamics—has modestly boosted returns from unhedged foreign equities. While currency movements can create short-term impacts, Empirical maintains its focus on building globally diversified portfolios designed for long-term results. This approach helps clients access a broader range of opportunities and supports a more resilient investment experience through market cycles, all designed to help clients achieve their goal-based returns. 

1. The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets outside of the United States and Canada. The index is maintained by MSCI Inc. and includes countries in Europe, Australasia, and the Far East.

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