The U.S. Dollar's Decline and the Rise of ESG-Driven Equities: A Strategic Case for Global Exposure

The U.S. dollar's prolonged weakness in 2025 has reshaped global capital flows, creating both challenges and opportunities for investors. With the U.S. Dollar Index (DXY) down nearly 11% year-to-date and projected to lose another 10% by 2026, the greenback's decline reflects a confluence of macroeconomic forces: waning U.S. growth, anticipated rate cuts, and shifting investor sentiment toward diversified assets according to market analysis. This environment has amplified the appeal of international equities, particularly those aligned with ESG (Environmental, Social, and Governance) criteria, which have outperformed traditional benchmarks amid dollar depreciation. While the iShares MSCI World ETF (URTH) is not explicitly ESG-focused, its broad international exposure and performance during dollar weakness offer insights into how ESG-aligned strategies can capitalize on this structural shift.

Dollar Weakness and the Resurgence of International Equities

The U.S. dollar's decline has acted as a tailwind for international equities, particularly for unhedged positions. As the DXY fell to 98.35 in late December 2025-a two-month low-investors flocked to global markets where earnings growth and currency dynamics offset domestic headwinds. For instance, the MSCI EAFE Index outperformed the S&P 500 in the first half of 2025, with emerging markets like India and Brazil surging due to policy normalization and easing inflation. This trend aligns with Morgan Stanley's analysis that dollar weakness historically boosts international returns for U.S. investors.

URTH, which tracks the MSCI World Index, exemplifies this dynamic. Despite its overweight position in U.S. megacap tech stocks, the ETF's global diversification has allowed it to benefit from currency tailwinds. Its 15.0% return as of December 2025 according to stock analysis underscores how dollar depreciation can enhance returns for international-focused vehicles, even those lacking explicit ESG criteria. However, ESG-focused ETFs with similar global exposure-such as the iShares ESG Aware MSCI EAFE ETF (ESGD) and Vanguard ESG International Stock ETF (VSGX)-have outperformed URTH, returning 16.7% and 15.09% year-to-date, respectively. This suggests that ESG alignment, combined with international diversification, may offer a dual advantage in a dollar-weak environment.

ESG Investing: A Dual Strategy for Risk Mitigation and Growth

The outperformance of ESG-focused equities in 2025 is not coincidental. Sustainable funds have consistently outpaced traditional counterparts, with median returns of 12.5% versus 9.2% in the first half of the year. This trend is driven by two factors: structural shifts in global capital flows and the growing emphasis on climate resilience. As central banks diversify reserves into gold and other assets, ESG ETFs-many of which include exposure to clean energy and climate adaptation-have attracted capital seeking both sustainability and macroeconomic resilience.

For example, the iShares ESG Aware MSCI EM ETF (ESGE), which focuses on emerging markets, has returned 9.74% year-to-date, leveraging both dollar depreciation and ESG-driven demand. Similarly, the ALPS O'Shares International Developed Quality Dividend ETF (OEFA) has surged over 21% in 2025, benefiting from a weaker dollar and its ESG-screened portfolio. These examples highlight how ESG strategies can combine currency tailwinds with long-term sustainability goals, offering a compelling alternative to traditional global equities.

Strategic Positioning: URTH as a Proxy and the Case for ESG ETFs

While URTH is not ESG-focused, its performance during dollar weakness illustrates the broader appeal of international diversification. However, investors seeking to align with ESG principles should consider ETFs that explicitly integrate sustainability criteria. The iShares ESG Aware MSCI EAFE ETF (ESGD), for instance, not only provides exposure to developed markets but also emphasizes companies with strong ESG ratings, including leaders in renewable energy and ethical governance. This dual focus on global diversification and sustainability positions ESG ETFs as both a hedge against dollar volatility and a vehicle for long-term growth.

Moreover, the structural decline of the U.S. dollar-driven by fiscal challenges and global tariff uncertainties-suggests that international equities will remain a key area of opportunity. ESG ETFs, with their emphasis on climate resilience and corporate governance, are uniquely positioned to navigate this landscape. As Morgan Stanley notes, the dollar's further depreciation could push global capital toward assets that balance macroeconomic trends with sustainability outcomes.

Conclusion: A New Paradigm for Global Investing

The U.S. dollar's weakening in 2025 has catalyzed a reevaluation of global investment strategies. While traditional international equities like URTH have benefited from currency tailwinds, ESG-focused ETFs have demonstrated superior performance by aligning with both macroeconomic trends and sustainability goals. For investors seeking to hedge against dollar volatility while supporting long-term value creation, ESG-aligned international equities represent a strategic imperative. As the global financial landscape becomes increasingly multipolar, the integration of ESG criteria into international portfolios will likely define the next era of resilient, growth-oriented investing.