The WSJ Dollar Index's Decline: Opportunities in Currency-Hedged Equity Strategies

The U.S. dollar's 9.9% decline since hitting a record high in September 2022 has reshaped the global investment landscape, creating fertile ground for investors to rethink their currency exposure. For those navigating this shift, the case for currency-hedged equity strategies has never been clearer. A weaker dollar not only reduces the appeal of U.S. assets but also supercharges returns for non-U.S. equities when converted back to dollars—a dynamic that demands tactical rebalancing and strategic hedging.

The Dollar's Downward Turn

The WSJ Dollar Index, which measures the greenback against a basket of major currencies, peaked at 105.14 in late September 2022. By July 2025, it had fallen to 94.73—a 9.9% decline—marking its lowest level in over three years. Even recent fluctuations, including a 0.7% drop to 94.65 on July 9, underscore the dollar's persistent weakness. Year-to-date, the index has lost 7.8%, while month-to-date gains of 0.76% hint at short-term volatility. This prolonged downtrend reflects reduced U.S. growth expectations, narrowing interest-rate differentials, and policy uncertainty.

Currency: The Hidden Driver of Returns

The dollar's decline has profound implications for non-U.S. equity investors. When the dollar weakens, returns from foreign stocks converted back to dollars rise, even if the underlying assets stagnate. For instance, a European equity portfolio that fell 8% in euro terms might show a 16% decline for U.S. investors if the euro depreciates by 10% against the dollar—a stark example of currency drag. Conversely, unhedged investors in non-U.S. markets during this period have faced amplified losses.

Historical data confirms this relationship. Over the past decade, periods of dollar weakness (defined as a 5%+ decline in the WSJ Dollar Index) have coincided with average annualized returns of 12% for unhedged non-U.S. equities, compared to 6% during dollar strength phases. The correlation is particularly strong with emerging markets, where a weaker dollar can boost local currencies and attract capital.

Capital Flows and Investor Behavior

The shift in capital is already evident. Foreign inflows into U.S. equities have dwindled to zero weekly net purchases in recent months, with outflows accelerating as the dollar weakens. Meanwhile, European equity markets have seen renewed demand, with ETFs tracking the MSCI Europe Index attracting over $5 billion in 2025—highlighting a geographic reallocation.

This trend aligns with broader investor sentiment. The simultaneous decline of the dollar, U.S. stocks, and bonds—a rare “trifecta” of weakness—has occurred in only 6% of periods for the U.S. compared to over 30% for emerging markets. Such conditions signal that global investors are no longer tethered to U.S. assets, creating opportunities in regions like Europe and Japan.

Hedging: Balancing Risk and Reward

Currency-hedged equity strategies offer a solution to mitigate exchange-rate risk while maintaining exposure to global growth. These strategies use derivatives to neutralize the impact of currency fluctuations, allowing investors to focus purely on underlying asset performance. For example, a hedged portfolio invested in Japanese equities would shield U.S. holders from yen volatility, capitalizing on Japan's economic recovery without currency drag.

Experts emphasize that hedging is not a binary choice but a continuum. “Hedging 50–70% of foreign exposure can optimize risk-adjusted returns during dollar declines,” says Maria Chen, global strategist at HSBC. “Full hedging might be excessive, as some currency gains can offset hedging costs.”

The Tactical Playbook

Investors should consider three steps to capitalize on this environment:
1. Rebalance Geographically: Reduce U.S. equity exposure and allocate to Europe, Japan, or emerging markets, where currency tailwinds are strongest.
2. Layer in Hedging: Use hedged ETFs (e.g., HEFA for Europe, HEDJ for Japan) to neutralize up to 70% of currency risk while retaining growth exposure.
3. Monitor Policy Shifts: Keep an eye on Federal Reserve guidance and global central bank rate decisions, as shifts in interest rates could alter the dollar's trajectory.

Conclusion

The dollar's decline since 2022 has created a compelling case for currency-hedged equity strategies. By understanding the mechanics of exchange-rate impacts and leveraging hedging tools, investors can navigate this environment with greater precision. The message is clear: in a world where the dollar's reign is waning, diversification and hedging are not just prudent—they're essential.