The U.S. Dollar's Historic Decline and the Case for Rebalancing Global Portfolios

The U.S. dollar, long the bedrock of global finance, is undergoing a historic shift. As of 2025, its weakening trajectory has sparked a reevaluation of global portfolio strategies, with leading institutions like BlackRock, Morgan Stanley, and Deutsche Bank urging investors to rebalance toward international and emerging markets. This reallocation is not merely a reaction to short-term volatility but a response to structural changes in global economic dynamics, driven by shifting growth patterns, monetary policy divergence, and the dollar's waning dominance as a safe haven.

The Dollar's Decline: A Tailwind for International Equities

The U.S. dollar's weakening has created a unique opportunity for international equities. BlackRock's analysis highlights that a declining dollar enhances returns for unhedged international investments, as currency exposure becomes a tailwind rather than a headwind. Historically, U.S. equities have dominated global portfolios, with the average advisor allocating 77% of equity exposure to domestic stocks. However, this overconcentration has left portfolios vulnerable to the S&P 500's current overvaluation and its heavy reliance on a handful of large tech stocks.

Morgan Stanley reinforces this perspective, noting that dollar weakness historically correlates with stronger performance in emerging markets (EM) equities. A weaker dollar attracts capital inflows to EM economies, reduces debt-servicing costs for bond issuers, and boosts commodity prices-critical for many EM economies. Deutsche Bank, while acknowledging the dollar's relative strength in 2025, anticipates a long-term weakening by 2026, driven by overvaluation and rising productivity in other regions. This shift, the bank argues, will create favorable conditions for EM and non-U.S. equities as carry trade flows and higher-yielding assets gain traction.

Diversification: Beyond U.S. Large Caps

The case for diversification is urgent. Morgan Stanley's Global Investment Committee has repeatedly emphasized that passive U.S. equity-index investing is a risky proposition in 2025. The S&P 500's concentration in a few large-cap tech stocks has created a "black hole" of volatility and overvaluation. By contrast, international equities-particularly in Japan and EM markets-offer lower volatility and better diversification benefits during drawdowns.

Deutsche Bank's 2025 outlook aligns with this view, advocating for a "deeply invested in growth" strategy that prioritizes equities but stresses the need for regional diversification. While the U.S. remains a growth center due to deregulation and tax relief, investors must hedge against currency risks by expanding exposure to Europe, Asia, and EM markets. Morgan Stanley further recommends diversifying into credit products, residential REITs, and alternative assets to capture risk-adjusted returns.

Actionable Steps for Strategic Reallocation

The evidence points to a clear playbook for investors: underweight U.S. large caps and overweight global and EM equities. BlackRock urges a strategic shift toward international equities, which have historically outperformed during dollar weakness. Morgan Stanley advises reducing exposure to overvalued U.S. indices and increasing allocations to EM and non-U.S. markets, where growth and inflation dynamics differ. Deutsche Bank, while cautious about near-term dollar weakness, recommends preparing for a 2026 shift by scaling back U.S. equity exposure and increasing EM allocations.

Additionally, Deutsche Bank highlights the importance of incorporating gold and other safe-haven assets as the dollar's traditional safe-haven status erodes. Morgan Stanley's emphasis on alternatives like REITs and credit products further underscores the need to move beyond traditional equity-index investing.

Conclusion: A New Era of Global Allocation

The U.S. dollar's decline is not a temporary anomaly but a harbinger of a broader reallocation of global capital. As BlackRock, Morgan Stanley, and Deutsche Bank collectively argue, investors must embrace a more diversified, globally balanced approach to capture growth and mitigate risk. The era of U.S.-centric portfolios is waning, and those who adapt now will be best positioned to navigate the shifting tides of 2025 and beyond.