The flight from the dollar The flight from the dollar http://www.federatedhermes.com/us/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedhermes.com/us/daf\images\insights\article\hanglider-grass-peak-small.jpg June 18 2025 June 18 2025

The flight from the dollar

Is this the beginning of the end of US exceptionalism?
Published June 18 2025
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A “perfect storm” of sorts is occurring in global financial markets this year: the dollar is weakening, Treasury yields are elevated and US equities are hovering near all-time highs.

With this in mind, investors might ask themselves: will global asset managers continue to rebalance their portfolios and diminish their strong US tilts—and will capital continue its slow yet steady flight from America?

Here, the recent renewal of hostilities in the Middle East tells its own story: in contrast to previous crises in the region, neither Treasurys nor the US dollar have strengthened. It’s also unusual to see the dollar (DXY) and US equities (S&P 500) both falling at the same time, as they have done this year.  

We could make the argument that, after pouring trillions of dollars into US assets over the last five years, international investors are now starting to rebalance their portfolios. US equities have been volatile and demand for Treasurys has been weak, with at least some of those flows going into gold, which has continued to strengthen.

For many investors, this latest dynamic will come as a surprise. The US equity market has enjoyed sustained growth for many years. (Yes, there were the 2000 and 2008 bear markets—and the brief Covid dip—but those have long since been left behind.)

Here the contrast is with other equity markets where the story of US exceptionalism over the past two-plus decades has been writ large. It took until 2024, for instance, for Japan’s Nikkei index to finally surpass its 1989 high. In Europe, the Euro Stoxx 50 only reclaimed its Dot Com-era prior peak from spring 2000 this past winter. The MSCI All Country World Index ex-US recently broke out of a trading range that had held since 2007.

No surprise, then, that the US made up nearly two-thirds (65.3%) of the MSCI ACWI on December 31, 2024 (even as the country accounted for just 28.6% of global nominal GDP). All of which is to say that if investors are rebalancing out of the US, there may still be some way to go. To our mind, the US dollar will likely need to come down further even if the US stock market does not.

Against this backdrop, our view is investors could do well to continue to consider opportunities ex-US. Europe, for example, has more monetary and fiscal stimulus levers to pull to generate economic growth. This, coupled with more attractive valuations, improving earnings expectations and a weaker dollar, makes for a possible—and possibly seismic—break from the past. In our view, international equities look more attractive now than at any point over the last 10 years.

Tags International/Global . Equity .
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DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Stocks are subject to risks and fluctuate in value.

Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.

The prices of gold and other precious metals may be subject to substantial price fluctuations over short periods of time and may be adversely affected by unpredictable international monetary and political developments.

International investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

U.S. Dollar Index indicates the general international value of the dollar by averaging the exchange rates between it and six major world currencies.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

Nikkei: A price-weighted index comprised of Japan’s 225 blue-chip companies traded on the Tokyeo Stock Exchange. Indexes are unmanaged and investments cannot be made in an index. 

Euro Stoxx 50 is an index of 50 blue-chip European stocks developed by Stoxx Ltd. and meant to represent sector leaders in the eurozone. Indexes are unmanaged and investments cannot be made in an index.

MSCI ACWI ex USA Index: Captures large- and mid-cap representation across 22 of 23 developed markets countries (excluding the U.S.) and 27 emerging markets countries. The index covers approximately 85% of the global equity opportunity set outside the U.S.

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