The mighty dollar isn't looking so mighty anymore. The U.S. Dollar Index is on track for its weakest year in over a decade, declining nearly 10% against a basket of major currencies through September. For American investors, this isn't just a curiosity on the currency trading desks—it's a fundamental shift that's affecting portfolios in ways both visible and hidden.

The Dollar's Dramatic Fall

The numbers are striking. Through September 2025, the dollar depreciated:

  • 13.5% against the euro
  • 13.9% against the Swiss franc
  • 6.4% against the Japanese yen
  • 5.6% against a basket of major emerging market currencies

This broad-based weakness stands in stark contrast to recent years when the dollar strengthened relentlessly, reaching multi-decade highs in 2022-2023. The reversal has been swift enough to catch many investors off guard.

What's Driving Dollar Weakness

Several factors converged to undermine the greenback:

Fiscal Concerns

The U.S. federal deficit has ballooned to concerning levels, and political dysfunction around the debt ceiling and government shutdowns has eroded confidence in American fiscal management. International investors who traditionally viewed Treasuries as the ultimate safe haven are questioning that assumption.

Rate Differentials Narrowing

As the Federal Reserve cut rates by 175 basis points since September 2024, the interest rate premium offered by dollar assets shrank. Currency traders follow yield differentials closely, and reduced American rates made the dollar less attractive relative to alternatives.

Policy Uncertainty

Trade tensions, tariff threats, and questions about Federal Reserve independence have all contributed to a sense that dollar policy has become less predictable. Currency markets prize stability, and the U.S. hasn't delivered it.

"The dollar has weakened sharply in 2025, driven by fiscal concerns and reduced confidence in policy. The world's reserve currency is on track for its weakest year in more than a decade."

— Cambridge Associates

Winners and Losers

Dollar weakness redistributes wealth in ways that aren't always obvious:

Winners

International stock funds: If you own international equity funds, you've received a hidden boost. A European stock that's flat in euro terms delivers a 13% gain to American investors when converted back to dollars. This "currency tailwind" has made international diversification finally pay off after years of U.S. outperformance.

U.S. exporters: American companies selling abroad benefit when foreign buyers' currencies stretch further. This has provided a modest boost to manufacturing and agriculture sectors competing in global markets.

Emerging markets: Countries that borrow in dollars see their debt burdens lighten when the greenback weakens. Goldman Sachs has forecast emerging market equities to rally partly on dollar weakness expectations.

Gold and commodities: Priced in dollars, commodities become cheaper for foreign buyers when the dollar falls, boosting demand. Gold's stunning 72% rally this year owes something to dollar weakness.

Losers

American tourists: That European vacation just got 13% more expensive in real terms. The dollar's purchasing power abroad has meaningfully diminished.

Importers: Companies that source goods internationally face higher costs, which may eventually pass through to consumer prices.

Foreign bondholders: International investors holding U.S. Treasuries have seen currency losses offset much of their interest income.

Portfolio Implications

The dollar's decline has several practical implications for your investment strategy:

Reconsider International Allocation

Many investors have underweighted international stocks after years of U.S. dominance. If dollar weakness persists—and Morningstar suggests the greenback may be entering "a more prolonged phase of cyclical weakness"—international diversification becomes more valuable. Consider whether your portfolio has appropriate exposure to non-U.S. equities.

Currency Hedging Decisions

Some international funds hedge currency exposure; others don't. In a weakening dollar environment, unhedged funds outperform. Review your international holdings and understand their currency approach.

Commodity Exposure

Commodities often perform well when the dollar weakens. If you believe dollar weakness will persist, modest commodity exposure could provide both diversification and inflation protection.

Real Assets

Real estate, infrastructure, and other tangible assets tend to hold value better than financial assets during currency weakness. These allocations can serve as portfolio anchors.

Will Dollar Weakness Continue?

Forecasting currencies is notoriously difficult, but several factors suggest the dollar's struggles may persist:

  • U.S. fiscal deficits show no sign of improving
  • The Fed may have further to cut if economic growth slows
  • Political uncertainty around 2026 elections could weigh on confidence
  • Alternative currencies, including the euro and yuan, are gaining credibility

However, the dollar remains the world's dominant reserve currency, and its weakness has already been substantial. Mean reversion could trigger a bounce, particularly if global growth disappoints and investors seek safety.

The prudent approach is not to bet heavily on any currency outcome, but to ensure your portfolio is positioned to benefit from—or at least withstand—continued dollar weakness. After a decade of dollar strength, that's a shift in thinking many American investors need to make.