Weaker Greenback Triggers Surge in International Equities — Evening Brief – 03.21.25
In 2025, diversifying beyond U.S. equities has proven rewarding, with international stocks significantly outperforming their U.S. counterparts year-to-date. A primary catalyst for this global rally—outside the U.S.—is the weakening U.S. dollar against foreign currencies, which has tipped the scales in favor of international markets.
This shift is evident in exchange-traded fund (ETF) returns: the iShares MSCI ACWI ex U.S. ETF (ACWX) has climbed 9% this year, while the SPDR S&P 500 ETF (SPY) has declined 4.3%. Although equity performance depends on numerous factors, foreign exchange dynamics have notably bolstered non-U.S. stocks in 2025.
To gauge the impact of currency movements, consider the rolling one-year changes in the U.S. dollar, tracked by the Invesco DB U.S. Dollar Index Bullish Fund (UUP), relative to the SPY/ACWX ratio. Since 2012, these metrics have exhibited a moderately positive correlation of approximately 0.5, a relationship that holds across shorter periods as well. This indicates that the dollar’s trajectory significantly shapes the relative performance of U.S. versus foreign equities.
In late 2024, the SPY/ACWX ratio hit a peak, reflecting an exaggerated preference for U.S. stocks that surged in the year’s closing months. While not a certain predictor of 2025’s shift, this extreme suggested that the U.S.-centric tilt had become unsustainable. Historical patterns reveal that such imbalances often foreshadow reversals, a trend now apparent in the negative spread between U.S. and foreign equities. Monitoring the dollar’s path can thus serve as a useful guide for anticipating market turns and adjusting investment allocations when trends appear overstretched.
Meanwhile, the recent correction in U.S. equities has moderated valuations, potentially laying the groundwork for improved long-term returns. Per Morningstar’s analysis, as of March 14, 2025, the Morningstar U.S. Market Index traded at a 5% discount to its fair value, with a price-to-fair-value ratio of 0.95—down from a 3% premium at the year’s start, following a 4.5% drop in stock prices.
Should investors act now? Dave Sekera, Morningstar’s chief U.S. market strategist, advises caution. “We need the market to stabilize and start to move up from here. And if it holds those gains, I think then the market will be fine until earnings season starts up again.”