USD decline fuels asset gains

By the OFX team | 10 July 2025 | 5 minute read

With the US Dollar Index (DXY) down by 10.8% in the first six months of the year, it’s the USD’s worst performance over the first six months of any year in 52 years¹ – and the worst half-year since the second half of 1991.

There is certainly a lot going on with the US dollar: worries over the rising US government deficit, uncertainty surrounding tariffs and trade deals with America’s major trading partners. Not to mention persistent concerns about a resurgence of inflation, which could devalue the currency.

Weaker US economic data has been construed as making it more likely that the Federal Reserve eases interest rates. The market now appears to expect at least 50 basis points of Fed rate cuts by the end of the year, possibly 75 basis points.

Major currencies gain ground

There are, however, beneficiaries of US dollar weakness; the obvious ones are the currencies on the other sides of the trades. At the top of the list, the Swiss franc. With the USD having lost about 12.2% against the franc this year; means the ‘Swissie has appreciated 14% in US dollar terms.

Similarly this year, the US dollar is down about 11.8% against the euro has fallen about 8.4% against the yen, and is down about 8.1% against the pound sterling. The US dollar is also down about 5.5% against the Australian dollar, and down 5.3% against the Canadian dollar.

Gold benefits from safe-haven demand

The turbulent outlook for the US dollar – amid trade and fiscal uncertainty, and the so-called “One Big Beautiful Bill” and the permanent tax cuts that come with it – cannot help but make markets cautious. In that situation, an obvious beneficiary is the gold price. The apprehension about the fiscal situation in the US is feeding-in to the “safe-haven” demand situation in which gold thrives.

As markets approach August 1 – when the 90-day pause (and extension) on the sweeping US tariffs announced earlier in the year ends – traders appear to see further upside for the yellow metal in the near term. Recent activity in gold has been bullish – the spot price is up more than 27% so far in 2025 at time of writing, and more than 41% to the good in the last 12 months – but price action has been flat in the past month, as markets have flirted with reinvigorated appetite for “risk-on” trades reinvigorated as trade tensions seemed to calm.

Technically, depending on who you talk to, resistance is said to be somewhere around the US$3,348–US$3,366 an ounce level, and a breakout above that would show enough bullish momentum to vindicate a sustained trend higher. But gold seems to be benefiting from the dollar’s weakness.

In fact, commodities in general typically show a negative correlation with the dollar over: along with international equities, they have posted the strongest negative correlation with the dollar over the past 20 years (with emerging markets slightly less correlated than developed markets’ equities)². Continued dollar weakness could be particularly beneficial to both asset classes.

Weaker USD supports US equities

Within US equities, a weaker dollar gives some relief to US companies that sell products or services outside the US. Coming into 2025, the consensus was that the US would be growing at a faster pace than other developed countries, and global investors were substantially overweight US assets – and the US dollar.

But after “Liberation Day,” investors downgraded US economic growth prospects, triggering the dollar’s slide. And suddenly, US companies with overseas revenue flows, which had been expecting a foreign-exchange headwind in 2025, embraced the pleasant notion of a currency-translation benefit, instead.

A weaker US dollar is a boon to American companies when they convert their international revenue into dollars in their accounts. This is a substantial tailwind, given that about 41% of the revenue of the S&P 500 companies comes from outside the US³.

In particular, the sustained decline of the dollar in recent months has provided a silver-lining for the tech sector after the tariff shock, and has helped that cohort rally in the stock market. And with tech and communication services now accounting for more than 41% of the S&P 500’s market capitalisation⁴, the rally in those sectors is helping to lift the broader index.

For some purist investors, any earnings lift that comes from US dollar weakness is not real, because it is not driven by improvements in company financials. It is true that the “quality” of earnings growth from currency conversions is not the same as that from business improvements, but it is part-and-parcel of life as a global business. Most of the large companies give guidance on a quarterly basis for what they assume will be the foreign-exchange impact on their revenue (and thus, profit) for the quarter, based on current exchange rates, but such guidance is always an imperfect science.

Momentum and earnings in a volatile market

These days, the US stock market is very susceptible to momentum, given fluctuations in liquidity and the increased preponderance of non-human trading activity. In the US alone, more than 70% of overall trading volume is generated through algorithmic trading and high-frequency trading (HFT), in which colossal volumes of shares are bought and sold mechanically at very high speeds. Not only do these programs seek momentum, they arguably create it.

In a febrile stock market such as the present, earnings-season trading becomes heavily influenced by whether company earnings “beat” or do not beat the market’s consensus expectation. Those that do manage a “beat” can expect a kick-along; those that fail to meet expectations can expect a pounding.

The US earnings season for the second quarter begins in earnest during the second full week of July. Analysts at US financial data firm FactSet estimate a (year-over-year) earnings growth rate of 5.0% for the S&P 500 companies, which would mark the lowest earnings growth reported by the index since the fourth quarter of 2023⁵. Earnings expectations for the second quarter largely match those for the first quarter, with growth expected to be essentially flat. But plenty of analysts believe that US dollar weakness could deliver a pleasant surprise for tech-oriented investors – and many savvy traders will be readying for such an outcome.

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