We examine a hypothetical strategy for switching between unhedged and currency-hedged international equity exposure based on the US Dollar Index's P&F chart.
Last Friday (3/13), the US Dollar Index (DX/Y) gave a buy signal for the first time since January of last year. The falling dollar was a major tailwind for international equities in 2025, helping the iShares MSCI EAFE ETF (EFA) to its best performance in more than a decade.
While not the only consideration for international exposure, currency movements can have a major impact on returns. While EFA was up more than 27% last year, the iShares Currency Hedged MSCI EAFE ETF (HEFA), which didn’t benefit from the weakness gained 19%, trailing EFA by 8%. Of course, this isn’t a one-way street – during periods when the dollar is rising, we would expect the currency hedged ETF to outperform.
As the disparity between the returns of EFA and HEFA this year illustrate, international equity returns can potentially be significantly enhanced by alternating between hedged and unhedged exposure to take advantage of currency movements. One possible strategy for alternating between hedged and unhedged exposure is using the point & figure signal of the US Dollar Index, which has trended well in recent years. Initial buy and sell signals have often been followed by multiple consecutive signals with substantial moves between signal changes. From the time DX/Y gave an initial sell signal last January to when it returned to a buy signal last week, the index experienced a peak-to-trough decline of more than 12.5% giving four additional sell signals along the way.
With the dollar now back on a buy signal we thought this would be an opportune time to update our study which examines the effectiveness of using of DX/Y’s P&F signal as an indicator for hedging currency exposure. This compares three hypothetical scenarios – buying and holding the iShares MSCI EAFE ETF (EFA), buying and holding the iShares Currency Hedged MSCI EAFE ETF (HEFA) and switching between the two based on DX/Y’s P&F signal – holding EFA when DX/Y is on a sell signal and holding HEFA when the dollar is on a buy signal. Our study uses price return data and goes from February 28, 2002, the first date for which we have available data for HEFA, through 3/18/26.
The returns for our holding period show a significant performance advantage for the switching strategy. Over that period, the unhedged ETF, EFA, generated a cumulative return of 160%. Its currency-hedged counterpart, HEFA, performed better, producing a cumulative return of 230.83%. However, the switching strategy significantly outperformed both funds, generating a cumulative return of 422%. So, if you have exposure to EFA or another EAFE-tracking fund, with DXY now on a buy signal, this may be the time to switch to rotate into a currency-hedged fund.
The table below shows every signal change for the US dollar index since 2/28/03 and the returns for each period. Over that 20+ year period, DX/Y has seen 61 signal changes, which means our hypothetical strategy would have had 61 trades, or roughly 2.5 trades per year. While not an overwhelming number of trades, as the entire portfolio (or sleeve) is being traded each time, it does represent annual turnover of around 250%. You can also see that while there have been long intervals between trades – like the last 14 months - there have also been instances where the switching strategy has traded in-and-out of a position in less than 10 days. It is also apparent that not every trade has been a winner, there have been several occasions when the switching strategy ended up on the wrong side of the currency hedge, however, the magnitude of the wins has more than made up for the losing trades. Overall, using DX/Y’s P&F signal as a currency hedging trigger has worked out quite well over the previous 20+ years, but the signals haven’t always been quite as reliable as they have been over the last few years.
A few notes on these results. The hypothetical switching strategy outlined above doesn’t account for any tax or transaction costs, which would certainly be higher than in the two buy-and-hold scenarios. It should also be noted that this study was conducted using return data for developed international equities. It shouldn’t be assumed that the results would be the same for any other international equity exposure. The basket of currencies that underly the US Dollar Index are all developed market currencies, so it’s reasonable to expect that the DX/Y signals used in our study are a more useful indicator for developed market currencies than they are for emerging markets, for example.
