“So, what has the stock market been up to?” This is a question that keeps popping up from investors who are anxious about tariffs, government shutdowns, and those looming debt concerns. Interestingly, the excitement around artificial intelligence—a technology many call the most groundbreaking since the internet or even the steam engine—seems to have drowned out those worries.
But if you look at the foreign exchange market, the atmosphere is a bit different. The first half of 2025 was particularly tough for the US dollar, marking its worst performance in over five decades. While the dollar has seen some recovery, it’s still struggling against major currencies like the euro and yen, and even some emerging market currencies such as the Mexican peso. My colleague Valerio Baselli pointed out that this decline could stem from “growing doubts about U.S. fiscal strength and erratic trade policies.”
Why Does a Decline in the Value of the US Dollar Matter to Investors?
Now, is a weak dollar really a big deal if you’re not in forex trading or planning a trip to Italy? It’s a mixed bag; there are both upsides and downsides to your investments. Let’s take a look at three asset classes that might benefit from a weaker dollar this year—and speculate a bit on their future and currencies.
Outperform #1: Gold Stocks
As a newly married couple, maybe you’ve been to Costco or found yourself getting into gold as a tangible investment. In 2025, gold prices saw a significant surge. According to the Morningstar Global Gold Index, gold mining stocks are doing much better than the broader stock and bond markets in the first three quarters. By early October, gold hit over $4,000 an ounce before pulling back a bit, and companies like Newmont are raking in substantial profits.
So, what connects gold to the dollar? John Mills from Morningstar points out that the recent spike in gold prices is largely due to it being a safe haven. Gold often competes with the dollar, which tends to gain strength during crises like the 2008 financial downturn or the pandemic.
As Morningstar’s Amy Arnott notes, many central banks are moving towards “de-dollarizing” their reserves. Fluctuating trade policies, budget deficits, and low interest rates raise questions about the dollar’s future. Consider the U.S. sanctions on Russia after the Ukraine invasion—some viewed that as “weaponizing the dollar.” So, a pivot to gold might be more about diversifying in these uncertain times.
Now, skeptics argue that gold may not be the best move since it has limited uses; unlike stocks and bonds, it doesn’t generate cash flow. While it’s true that there are jewelry needs and some industrial applications, much of gold’s value comes from speculation. Historically, gold has faced lengthy stagnation periods, like between 1987 and 1999. As Arnott mentioned, “buying gold at its all-time highs likely isn’t the wisest decision.”
That said, gold has historically been a reliable store of value. Plus, it serves as a diversification tool in portfolios, especially during inflationary periods when stocks and bonds might struggle. It’s becoming more common to see gold as a strategic hedge, regardless of any belief in currency deterioration.
Outperform #2: Foreign stocks
Thanks to the current buzz around AI, U.S. stocks have bounced back from their earlier dips this year, but they’ve still lagged compared to international stocks, at least for those investing in dollars. According to the Morningstar Global Markets Ex-US Index, stocks from developed countries are much more pronounced compared to those in emerging markets.
Looking at returns, both the Morningstar Europe Index and the Morningstar Japan Index show that in terms of currency conversion, their performance closely matches U.S. stocks. But, if these currencies strengthen against the dollar this year, those U.S. investors without hedging could stand to gain even more.
Emerging market stocks have outperformed too, with some of the best returns we’ve seen in 15 years. For instance, the Morningstar Korea Index shot up by over 75% for dollar investors in 2025, with countries like China, Mexico, and Brazil also making significant gains. It’s worth pondering whether this trend will persist. My colleague Christine Benz compiled forecasts suggesting that international stocks could outshine U.S. stocks over the next decade. This implies that even beyond 2025, there might still be growth potential.
The benefits of global diversification are diminishing, yet some exceptional businesses exist beyond our borders too. My colleague Jeff Ptak has observed that many U.S. investors are quite weighted towards international stocks. In his view, having too many U.S. stocks can be problematic. Historically, there have been times when having international exposure has served U.S. investors very well.
Outperform #3: Emerging Market Debt
This year has also seen significant gains in emerging market government bonds, which stands out even amid a generally robust bond market. According to the Morningstar Emerging Markets Bond Index, the total value, including dollar-denominated debt, has increased by over 10% in 2025.
A weaker dollar can ease the debt load for emerging nations borrowing in U.S. currency. Plus, bonds in local currencies become more attractive to U.S. investors when those currencies strengthen. Other dynamics, like enhanced credit quality in emerging markets and the urge for diversification outside the U.S., are also nudging these asset classes upward. Some soaring commodity prices have contributed to this trend as well. According to the Morningstar 2025 Outlook, emerging markets have promising valuations and appealing real yields.
Even with solid returns in 2025, Morningstar Investment Management still finds local currency emerging market bonds appealing. They cite high interest rates, a weak dollar, and a favorable economic landscape as key reasons. While this asset class isn’t a great diversifier since it’s often closely related to stocks, its potential for income and growth can inject some excitement into a bond portfolio.
What is the Outlook for the Value of the US Dollar?
“Forex forecasters make weather forecasters look reliable,” a fund manager once remarked, not wanting his identity revealed out of concern for upsetting foreign exchange traders or meteorologists. The value of a currency is shaped by multiple factors, and technical aspects play a significant role—after all, everything is comparative in the foreign exchange world.
Keeping all of this in perspective, my colleague, Muhammad Hamza Saleem, presents a thoughtful analysis of five fundamental and sentimental factors that might affect the dollar’s value. His model suggests that the dollar may gradually weaken in the coming years, given rising fiscal pressures and slowing growth.
The dollar has historically fluctuated through cycles. Arnott references downturns from the 1970s, late 1980s, and early 2000s. Following a rise throughout most of the 2010s and a jump in 2022, the current drop in 2025 could signal a significant shift.
Some experts, including Professor Kenneth Rogoff from Harvard, warn of more substantial threats to the dollar’s status as a global key currency. He stresses that we shouldn’t take the dollar’s prominent position in international finance for granted.
I think it’s wise to consider currency diversification. Investing in asset classes that could thrive even as the dollar diminishes is quite a prudent strategy. Just look at the scenario in 2025 for evidence.
