Performance trends for various assets in falling dollar environments reveal some surprising tracking and notable divergences so far in 2025.
The US Dollar is having its worst year since 2017. The ICE U.S. Dollar Spot Index (DX/Y) has returned -8.36% so far in 2025 (through 12/1). The default chart of DX/Y gave four consecutive sell signals from January to June, declining from a rally high at 110 to a low of 96.50 by July. Since then, the index has found a consolidation range between that 96.50 low and 100, unable to break above or below for the past five months. At the beginning of November, we did see the dollar move into a double top formation at 100, marking the first such formation since the descent began in January. However, we have not seen further follow-through after that point, as the most recent price action leaves DX/Y just above the mid-point on its trading band near 99.
We have been running US Dollar Study for many years, which is simply used to classify long-term price action in the US Dollar into two categories, a rising or falling dollar environment. If the Dollar rises 10% or more from a trough, it is a rising dollar. Alternatively, if it falls at least 10% from a peak, it is classified as a falling dollar. These parameters are not meant to pin-point specific trades, but rather differentiate between different regimes to provide perspective around price action from other assets.
The current falling dollar regime began after DX/Y hit its recent peak on January 13, 2025, continuing for the past 322 days. That length is the longest falling dollar environment we have seen since the 409-day stretch that ended on February 16, 2018. We saw another 331-day stretch that ended in May 2011. After that we need to go back to the 853-day period ending in March 2008.
There have been a total of 14 rising and 15 falling dollar regimes since the origin of our study in 1985. The variety of market environments seen during those periods have produced some interesting trends, helping to better understand what kind of price action to expect during the different regimes. As expected, we have seen international equities and commodities show strong average returns during falling dollar environments. Domestic equities do not show the same magnitude of outperformance, as they have shown strong returns in both rising and falling dollar regimes. While the historical trends can provide helpful perspective, we know that past performance does not translate into actual results.
With that said, comparing the historical averages with the recent performance does show some surprising similarities, alongside some major divergences. The areas of the global equity market that have been leading the way throughout 2025 are very close to their historical norms. This includes emerging markets (EEM) and US growth (VOOG), which are each within 1% of the average returns during falling regimes. The S&P 500 Index (SPX) is 1.13% below its average. Other major representatives for developed markets (EFA) and the Nasdaq-100 Index (NDX) are within 4% of their historical means.
The laggard areas of the domestic equity market have not been so lucky. The S&P 600 SmallCap Index (SPSML) is only up 5% during the current falling dollar regime, about 12% lower than the historical average. The S&P 400 MidCap Index (SPMID) is also only up about 5%, more than 14% off its historical average. Value stocks have also trailed notably, with (VOOV) sitting over 7% off its average. We saw some recent breadth improvement from these laggard areas to end November. Of course, we do not suggest making asset allocation adjustments simply based on the laggard performance of these assets. However, if the dollar continues to maintain its downtrend, that could provide further tailwinds in these underperforming areas moving forward.
The largest differences have been in the commodities space. Gold, which has historically been inversely correlated to a falling dollar, saw the same directional movement this time, but substantially more amplified. The Gold Continuous proxy (GC/) has more than doubled the average performance during falling dollar regimes. On the other hand, Crude Oil (CL/) has been the opposite. Liquid gold shows an average gain of 25% during falling dollar periods, but we have seen the commodity decline by more than 25% so far this year. There are many different reasons or catalysts for the price action across any of the assets, and especially in the commodities. Typically, a falling dollar provides more tailwinds for commodities than domestic equities, making crude oil another interesting area to monitor if we see the dollar continue lower.
