Why the US Dollar's Decline Presents a Strategic Opportunity for International SMID Stocks

The US Dollar Index (DXY) has fallen by over 10% since January 2025, marking a significant shift in global currency dynamics. This decline, driven by tariff uncertainties, weak US economic data, and political pressures on monetary policy, has profound implications for investors. Nowhere is this clearer than in the world of small- and mid-cap (SMID) equities outside the US, which trade at steep discounts to their American peers. For those willing to look beyond the dollar's volatility, this presents a rare asymmetric opportunity.

The Dollar's Decline: Causes and Consequences

The DXY's slide—from 108.37 in January to 97.25 by late June—reflects a confluence of structural and cyclical forces. Weak US economic indicators, such as a 37,000-job ADP report in May (the weakest in two years) and a contraction in the ISM Services PMI, have fueled concerns about recession risks. Meanwhile, tariff disputes and geopolitical tensions have eroded the dollar's safe-haven appeal.

This depreciation has far-reaching consequences. A weaker dollar boosts the purchasing power of foreign investors, reduces import costs for US consumers, and—crucially for SMID stocks—enhances the competitiveness of companies outside the US that export to dollar-heavy markets.

How SMID Stocks Benefit: Three Key Channels

1. Currency Translation Gains:
   Companies in Europe, Asia, and emerging markets with US dollar revenues but local currency costs stand to gain directly. A weaker dollar inflates their dollar-denominated earnings when repatriated, even if their local operations stagnate. For example, a German SMID firm selling to US automakers sees its dollar revenues rise by 10% for the same volume of goods.

2. Export Competitiveness:
   A weaker greenback makes non-US goods cheaper for US buyers, favoring exporters in sectors like industrials, technology, and consumer discretionary. This is a lifeline for SMID firms, which often lack the scale of multinational peers to dominate global markets.

3. Lower Repatriation Costs:
   Many SMID companies hold profits in local currencies. As the dollar weakens, converting those profits back into stronger local currencies reduces the cost burden for reinvestment or shareholder returns.

Valuation Gaps: The Undervalued Opportunity

International SMID stocks are trading at 40–50% discounts to their US counterparts in sectors like technology and healthcare. This gap persists despite their growth potential and lower valuations. For instance, show European SMID stocks trading at 12x earnings versus 20x for US peers.

The discount reflects misperceptions about risk. Investors often overstate geopolitical risks or underestimate the resilience of SMID firms in stabilizing global growth environments. In reality, many of these companies are regional leaders with strong balance sheets and niche advantages.

Addressing the Risks: Why Now is the Time to Act

Critics argue that dollar volatility and tariff-driven inflation could destabilize markets. Yet the data suggests these risks are already priced in. The Federal Reserve's cautious stance and falling bond yields indicate a policy environment supportive of risk-taking. Meanwhile, the dollar's overvaluation—two standard deviations above its 50-year average—implies further declines are probable.

The urgency comes from the tariff-inflation nexus. As trade disputes escalate, companies exposed to dollar-denominated inputs (e.g., energy, commodities) may face margin pressures. SMID stocks, however, are more insulated due to their localized supply chains and smaller exposure to global pricing pressures.

A Call to Rebalance

Investors should rebalance portfolios toward international SMID exposures now. Focus on regions like Europe, where SMID firms in industrials and tech benefit from the euro's 14% upside (per J.P. Morgan projections), and Asia, where yen appreciation could boost Japanese exporters.

Conclusion

The US dollar's decline is not just a macroeconomic event—it is a catalyst for revaluing overlooked assets. International SMID stocks, with their valuation discounts and structural tailwinds, offer asymmetric upside as global growth stabilizes. Investors who ignore this trend risk missing a generational opportunity. The time to act is now, before inflationary pressures from tariffs force a more expensive entry point.

Data sources: U.S. Dollar Index (DXY) historical data, J.P. Morgan Capital Market Assumptions, Federal Reserve Economic Data.