The U.S. Dollar: Why It Matters to Investors
Since reaching a low of 96 in January, the U.S. Dollar Index has climbed more than 5.5%, recently reaching 101.50. That move allowed the index to break above an important area of technical resistance, and it now sits just below its longer-term bearish trend line.
Because changes in the value of the U.S. dollar can have a meaningful impact on stocks, bonds, commodities, and international investments, we thought it would be a good time to revisit Nasdaq Dorsey Wright’s (NDW) study examining how different asset classes have historically performed during periods of a strengthening versus weakening dollar.
What Is the U.S. Dollar Index?
When you hear news reports discussing "the dollar", they are usually referring to the U.S. Dollar Index rather than the value of the dollar against a single foreign currency.
The U.S. Dollar Index measures the value of the U.S. dollar against a basket of six major global currencies:
- Euro
- Japanese Yen
- British Pound
- Canadian Dollar
- Swedish Krona
- Swiss Franc
The index was introduced in 1973, with futures contracts beginning in 1985. Aside from replacing several European currencies with the euro after its creation, the index has remained largely unchanged.
Because it compares the dollar against currencies of many of our largest trading partners, the index provides a broad measure of the dollar's overall strength or weakness.
Source: Nasdaq Dorsey Wright
How Rising and Falling Dollar Markets are Defined
To study how different investments perform in various dollar environments, NDW classifies periods using a simple rule:
- Rising Dollar Market: Begins when the U.S. Dollar Index advances at least 10% from a significant low and continues until the index experiences a correction of at least 10%.
- Falling Dollar Market: Begins when the index declines at least 10% from a significant high and continues until it rallies at least 10%.
Using this methodology allows NDW to identify sustained trends rather than reacting to short-term fluctuations.
Where We Stand Today
Although the dollar has rebounded more than 5.5% from its January low, it has not yet risen the full 10% required under the study to officially qualify as a new rising dollar market.
As a result, the research still classifies the current environment as part of the falling dollar cycle that began in January 2025, when the Dollar Index peaked near 110.
That said, the picture could change relatively soon. If the Dollar Index reaches approximately 105.10, the study would identify a new rising dollar market beginning from this year's January low.
A Look at History
Since 1985, NDW’s methodology has identified:
- 14 rising dollar markets
- 15 falling dollar markets (including the current period)
On average:
- Dollar cycles last about 512 days.
- Rising dollar periods have averaged 598 days and approximately +20% appreciation.
- Falling dollar periods have averaged 431 days with an average decline of about 17%.
Although the current falling-dollar period now shows only about an 8% decline, that's because the dollar has already recovered from its January low. At its weakest point earlier this year, the Dollar Index had fallen roughly 13% from its 2025 peak.
Source: Nasdaq Dorsey Wright
How Different Investments Have Historically Performed
NDW’s research compares historical performance across a wide range of asset classes, including:
- U.S. stocks
- International developed-market stocks
- Emerging market stocks
- Bonds
- Large-, mid-, and small-cap stocks
- Growth and value stocks
- Commodities
The chart below compares average returns during falling dollar markets (red bars) versus rising dollar markets (green bars). While some asset classes have shorter performance histories, all data extends back to at least 1995.
Source: Nasdaq Dorsey Wright
Several themes stand out:
- U.S. stocks, as measured by the S&P 500, have historically performed well in both environments but have generally delivered stronger returns during periods of a weakening dollar.
- International and emerging market stocks have significantly outperformed during falling dollar environments. While currency movements contribute to this advantage, they do not fully explain the magnitude of the performance difference.
- Commodities, including gold and crude oil, have historically benefited from a weaker dollar. Since most commodities are priced in U.S. dollars, they often become more attractive as the dollar declines.
Sector Performance
Because different industries can respond very differently to changes in the dollar, NDW also examined the performance of the 11 major U.S. stock market sectors using data beginning in 1992.
Not surprisingly, sectors closely tied to commodities—including Energy, Basic Materials, and, to a lesser extent, Industrials—have historically performed much better during falling dollar environments than during periods of dollar strength.
Bottom Line
Although NDW’s study has not yet officially shifted to a rising dollar environment, there are encouraging signs that such a transition may be underway. The Dollar Index has gained more than 5.5% from its January low, recently broke above an important resistance level, and now sits just below its longer-term downward trend line.
If the dollar continues to strengthen, history suggests that certain asset classes and market sectors may begin to outperform while others could face headwinds.
As active portfolio managers, we believe it is important to monitor these changing market dynamics. Understanding how a strengthening or weakening dollar has historically influenced investment performance can help identify potential risks, uncover new opportunities, and ensure portfolios remain appropriately positioned as market conditions evolve.
The current reading for the PR4050 is: U.S. Equity Core = 99.30% & Money Market = 7.75%. For the PR4050 indicator to trigger and alert us when we should consider moving to cash, U.S. Equity Core must be 40% or below and Money Market must be 50% or above.
Source: Nasdaq Dorsey Wright
Below is the most recent D.A.L.I. (Dynamic Asset Level Investing) Indicator showing International Equities and Domestic Equities in the top two spots, while both maintain a commanding lead over Cash and Fixed Income.
Source: Nasdaq Dorsey Wright
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