The impact of a weaker US dollar on international markets and ETF performance

In 2025, the US dollar has weakened significantly relative to a broad basket of global currencies. This trend reflects multiple factors including changing monetary policy expectations, geopolitical shifts and investor repositioning away from the greenback.

A weaker dollar can have broad implications for investors and corporate treasury strategies. For ETF investors, particularly those with exposure to international bonds and credit markets, a declining dollar often translates into higher total returns on non-USD assets once currency effects are taken into account.

Why the dollar has been under pressure

Several macroeconomic and policy drivers explain the decline in the US dollar in 2025:

1. Monetary policy divergence between the United States and other advanced economies has reduced the relative appeal of dollar-denominated assets. Markets have priced in expectations of future rate cuts by the Federal Reserve, which makes holding dollars less attractive.
2. Global growth concerns and geopolitical tensions have encouraged flows into other currencies, especially the euro.
3. Despite higher nominal interest rates in the United States for much of the year, the differential between US yields and yields in other regions has narrowed, reducing the carry advantage for the dollar.

These dynamics are expected to persist into 2026 as global markets continue to adjust to shifting growth prospects and central bank policies.

What a weaker dollar means for ETF returns

Currency movements can play a significant role in total return calculations for ETFs with international exposure. When the US dollar weakens, assets denominated in other currencies often generate enhanced returns for holders whose base currency is the dollar.

This effect tends to be especially visible for:

Global and international fixed income

International bonds become more attractive for investors when the dollar weakens. A weaker dollar means that coupon and price returns on bonds outside the United States translate into higher effective returns in dollar terms. Performance of international developed-market bonds has benefitted in part from this dynamic.

For ETF investors, products that track non-US fixed income markets can therefore deliver improved total returns in a weak dollar environment. This is especially relevant for allocations that include ETF exposures to European corporate bonds or global aggregate bond indices ex-USD.

Emerging markets exposure

Emerging market equities and bonds priced in local currencies often outperform when the dollar is weak. Capital flows tend to shift into higher-yielding assets outside the United States as the appeal of dollar-based assets declines.

For investors in diversified ETF portfolios, this can mean relative outperformance for non-US allocations over US-centric ETFs when currency effects are favourable.

Implications for fixed income ETF strategies

A weakening dollar often coincides with lower real yields and easier global financing conditions. This environment can be favourable for strategies that prioritise yield and credit spread carry, such as high yield corporate bond ETFs.

For example, an ETF like Amundi EUR High Yield Corporate Bond ESG may benefit from a combination of strong credit carry and currency effects when non-USD yields and bond prices rise.

Likewise, money-market oriented ETFs like Smart Overnight retain their value by providing liquidity and short-term yield while larger macroeconomic trends evolve.

How forex fits into corporate treasury

Corporate treasury teams should consider currency trends as part of broader asset allocation decisions. A weaker dollar can create opportunities to:

• increase exposure to non-USD fixed income holdings through ETFs,
• hedge currency risk using instruments appropriate to the company’s risk tolerance,
• balance liquidity tools with yield-oriented ETFs that may benefit from global trends.

In all cases, understanding how exchange rates influence total returns is crucial for maximising the effectiveness of treasury allocations.

Conclusion

The downward trend in the US dollar in 2025 has created a backdrop where international fixed income and diversified ETF strategies can shine. Currency effects, while often overlooked, have a substantial impact on total returns for investors with global exposures.

By incorporating insights into currency dynamics and aligning them with ETF allocations including money market exposure and corporate credit ETFs, companies and individuals can position their treasury for both stability and performance.

FAQ: dollar weakness and ETF exposure

Does a weak dollar always benefit international ETFs?
Generally, yes for unhedged exposures, because currency gains add to underlying returns.

Should all ETF investors focus on currency effects?
Currency should be one of the factors considered alongside credit quality and yield.

Can a corporate treasurer hedge dollar risk?
Yes, through hedging instruments or by using local currency exposures in ETFs.

Sources & references

• Boursorama perspective on the dollar’s decline in 2025 shows the US dollar index falling by more than 10 percent this year.
  https://www.boursorama.com/bourse/actualites/perspectives-du-dollar-avec-la-baisse-de-taux-de-la-fed-723feb2c4fd6fa0d454452d0ac4352fd
• Analysis of the dollar weakening and its global monetary implications by IRIS highlights long-term depreciation trends.
  https://www.iris-france.org/dollar-en-baisse-quelles-consequences-pour-le-paysage-monetaire-mondial/
• Schwab research on why a weaker dollar may boost international bonds explains currency effects on global fixed income performance.
  https://www.schwab.com/learn/story/why-weaker-dollar-may-boost-international-bonds
• Natixis macro analysis on weaker dollar consequences and opportunities discusses broader market implications.
  https://www.im.natixis.com/fr-ch/insights/macro-views/2025/exploring-the-dynamics-of-a-weaker-dollar-consequences-and-opportunities