Investment Strategy2025-09-03

Continued Dollar Strength Dampens International ETF Appeal, Hedging Strategies Gain Importance

As the dollar index continues to strengthen, overseas investment ETFs are underperforming. It is now the right time to employ response strategies using currency-hedged ETFs or sectors that benefit from dollar strength.

Admin

With the Dollar Index (DXY) holding above the 104 level and continuing to strengthen, overseas investment ETFs are facing return erosion due to currency fluctuations. In particular, European and emerging market ETFs have posted decent returns in local currency terms, yet show weak performance when converted to dollars, sparking growing investor interest in currency hedging strategies.

Background and Outlook for Dollar Strength

Dollar strength is stemming from the relative resilience of the U.S. economy and the Federal Reserve's cautious monetary policy stance. Higher real interest rates compared to other major economies and safe-haven demand are underpinning dollar demand. In particular, the possibility of further rate cuts by the European Central Bank and concerns about a slowdown in the Chinese economy are making the dollar relatively more attractive.

Impact on International ETF Performance

The iShares MSCI EAFE ETF (EFA) rose 2.1% in local currency terms over the past three months, but recorded a loss of -1.8% when converted to dollars. The Vanguard Developed Markets ETF (VEA) showed a similar pattern, demonstrating the significant impact that currency movements can have on returns. Emerging market ETFs were hit even harder, with EEM posting a -5.2% decline in dollar terms.

Currency-Hedged ETFs as an Alternative

In this environment, currency-hedged ETFs are drawing attention. HEFA, the hedged version of the iShares MSCI EAFE ETF, achieved a 3.1% return over the same period by eliminating currency effects. The Xtrackers MSCI World ex USA HDGD Fund is also delivering stable performance through currency hedging, emerging as an attractive alternative for investors looking to minimize currency risk in their overseas investments.

Sector Strategy Under Dollar Strength

In a strong-dollar environment, multinational companies with high overseas revenue face earnings headwinds, but retailers with high import dependence or companies that import raw materials can actually benefit. Additionally, small-cap ETFs focused on the U.S. domestic market (IWM) and real estate ETFs (VNQ) are not affected by currency movements and are considered relatively safe investment options.

Conclusion

With dollar strength persisting in the current environment, it is important to maintain international diversification while managing currency risk. Utilizing currency-hedged ETFs or adjusting asset allocation toward sectors that benefit from a strong dollar can enhance portfolio stability. However, since dollar strength will not last forever, it is advisable to maintain a balanced global diversification strategy from a medium- to long-term perspective.

#dollar strength#international ETF#currency hedge#EFA#VEA#emerging market ETF#currency risk

Investment Strategy2026-03-16

Low-Volatility ETF USMV Emerges as Core Defensive Play

Investment Strategy2026-03-16

Covered Call ETFs Surge in Popularity as Income Focus

Investment Strategy2026-03-15

Portfolio Rebalancing Strategy in Geopolitical Crisis

Apply with the Rebalancing Calculator

Automatically calculate exactly how much to buy and sell to rebalance your portfolio.

Start Rebalancing Calculator

Have any questions?