Market Analysis2025-11-03
Dollar Weakness Continues, Emerging Markets and Commodity ETFs Rise in Tandem
The dollar index has fallen to 102 following Fed rate cuts, boosting emerging market assets. EEM surged +4.5% on the week, while commodity ETF DBC rose +3.8%, demonstrating the benefits of dollar weakness. An asset allocation calculator is needed to implement a currency diversification strategy.
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In the first week of November 2025, the dollar index (DXY) fell 1.2% week-over-week to 102, hitting its lowest level in three months. After the Fed cut rates by 0.25% and signaled the possibility of further cuts, dollar selling pressure intensified. The euro rose +1.5% against the dollar, recovering the 1.09 level, while the yen strengthened +1.8% to enter the 148 range. Dollar weakness raises the relative value of non-dollar assets, increasing the appeal of emerging market and commodity investments. EEM (Emerging Markets ETF) surged +4.5% on the week, posting a year-to-date return of +18%, while DBC (Invesco Commodity ETF) rose +3.8% with broad strength across gold, crude oil, and copper. GLD (gold ETF) rose +2.9%, breaching $2,050 per ounce, and USO (crude oil ETF) climbed +4.2%, recovering to $82 per barrel as OPEC production cut extensions and dollar weakness worked in tandem. Investors should use the rebalancing calculator to review their emerging market and commodity allocations and use the asset allocation calculator to optimize currency diversification strategies during periods of dollar weakness.
Causes of Dollar Weakness and the Outlook Ahead
The primary driver of dollar weakness is Fed rate cuts. At the November FOMC meeting, the Fed cut rates by 0.25%, lowering the federal funds rate to 4.25–4.50%, and Chair Powell left open the possibility of further cuts. Markets are pricing in an 85% probability of another 0.25% cut in December. Rate cuts reduce the yield on dollar deposits, diminishing the appeal of holding dollars. Overseas funds are rotating into other currencies such as the euro and yen, and US Treasury yields have fallen to 3.8%, narrowing the spread with German bunds (2.2%) and serving as a driver of euro strength. The relatively hawkish stance of European and Japanese central banks adds to this dynamic: the ECB is holding off on rate cuts due to concerns about re-accelerating inflation, supporting the euro, while the Bank of Japan continues normalizing policy, increasing upward pressure on the yen. The narrowing interest rate differential between the US and Europe/Japan is accelerating dollar weakness. Concerns about the expanding US fiscal deficit are also weighing on the dollar. Federal government debt has exceeded 120% of GDP, raising fiscal sustainability concerns, and the trade deficit is running above $800 billion annually, sustaining excess dollar supply. Credit rating agencies have warned of a possible US credit rating downgrade, further undermining confidence in the dollar. Easing geopolitical risks have also played a role: the resumption of US-China trade negotiations has spurred hopes for de-escalation, encouraging risk appetite, while a calming of Middle East tensions has reduced demand for safe-haven assets including the dollar. Expectations of a global economic recovery have lifted growth forecasts for Europe and emerging markets, increasing the appeal of non-dollar currencies. For the dollar outlook: in the short term (3–6 months), continued Fed rate cuts could push the dollar index below 100, with the euro targeting 1.10 and the yen targeting 145. In the medium term (1–2 years), a soft landing for the US economy would limit dollar weakness, while a recession could trigger renewed safe-haven dollar demand. In the long term (3–5 years), structural US fiscal and trade deficits are likely to act as headwinds for the dollar, and the rise of alternative currencies such as the Chinese yuan and euro could gradually erode dollar dominance. For investors, dollar weakness boosts dollar-denominated returns on foreign assets (VXUS, EEM) through currency gains; commodity prices (gold, oil, copper) rise with dollar weakness, increasing the appeal of DBC and GLD; and US exporters (Apple, Boeing) see improved earnings, benefiting export-oriented sector ETFs. Use the rebalancing calculator to review your dollar vs. non-dollar asset mix, consider increasing foreign asset exposure from 60–70% to 70–80% if dollar weakness persists, and use the asset allocation calculator to simulate portfolio returns under dollar weakness scenarios (DXY at 100 vs. 95) to quantify the currency diversification effect.
EEM: Benefiting from Dollar Weakness in Emerging Markets
EEM (iShares MSCI Emerging Markets ETF) is among the biggest beneficiaries of dollar weakness. Dollar weakness benefits emerging markets for several reasons. First, it reduces the burden of dollar-denominated debt: emerging market governments and corporations hold dollar-denominated debt equal to 30–40% of GDP, and dollar weakness eases the repayment burden, increases the value of foreign exchange reserves, and improves creditworthiness, lowering borrowing costs. Second, it drives increased capital inflows: as the dollar weakens, global funds rotate into higher-yielding emerging markets, lifting the prices of EM stocks and bonds. Third, currency appreciation helps: as emerging market currencies (yuan, rupee, real) rise, import prices fall, inflation pressure eases, and central banks can cut rates to stimulate their economies. Fourth, emerging markets benefit from their commodity export exposure: as prices of gold, oil, and copper rise, trade balances improve, and economies of resource-rich countries like Brazil, Russia, and Chile benefit from the accompanying dollar weakness and currency appreciation, widening current account surpluses. On recent performance, EEM is up +18% year-to-date through 2025, approaching the S&P 500 (+22%). As the dollar index DXY fell from 108 to 102, a decline of 5.6%, EEM delivered +13% in local currency terms and +5% from currency effects, for a total dollar return of +18%. China's CSI 300 rose +22%, India's Sensex +18%, and Brazil's Bovespa +15%, reflecting broad strength across emerging markets. In terms of country-level exposure, China (30%) benefits doubly from yuan appreciation and fiscal stimulus, India (20%) delivered the strongest performance with rupee appreciation and GDP growth of +7%, and Brazil (5%) benefits from real appreciation and rising commodity exports. For investment strategy, EEM can serve as a dollar-weakness hedge at a 5–10% portfolio allocation. Consider increasing EEM to 10–15% when the dollar index DXY enters the sub-100 range. Additional returns can be expected if emerging market currencies (yuan, rupee) continue to strengthen. Use sharp pullbacks (10%+ declines) as buying opportunities. Use the rebalancing calculator to set a target EEM allocation (e.g., 7%), and if dollar weakness drives EEM to exceed 10% of the portfolio, sell the excess to lock in gains. Use the asset allocation calculator to simulate EEM allocations of 5%, 10%, and 15% under dollar weakness assumptions (DXY at 100 vs. 95) to identify the optimal emerging market weighting.
DBC and GLD: Commodity Investment Strategies
DBC (Invesco DB Commodity Index Tracking Fund) provides diversified exposure to energy, metals, and agriculture, benefiting from dollar weakness. DBC's composition is roughly 60% energy (crude oil—WTI and Brent—35%, natural gas 15%, gasoline 10%), 25% metals (gold 10%, silver 5%, copper 7%, aluminum 3%), and 15% agriculture (corn 6%, soybeans 5%, wheat 4%). As a physical asset fund there is no P/E concept; current prices are up about 50% from 2020 lows but remain about 30% below 2008 highs, suggesting further upside potential. The expense ratio is 0.87%, in the middle range for commodity ETFs. Year-to-date through 2025, DBC has gained +12%, trailing the S&P 500 (+22%), but if dollar weakness accelerates, commodity prices are likely to rise further. Dollar weakness is favorable for commodities for several reasons. Commodities are priced in dollars, so dollar weakness lowers prices in non-dollar currencies, boosting demand and lifting dollar-denominated prices. Gold and oil have historically exhibited roughly a -0.7 correlation with the dollar index, and on average a 1% decline in the dollar corresponds to an approximately 0.8% rise in gold prices. As an inflation hedge, dollar weakness raises import prices and fuels inflation; gold, oil, and other commodities benefit as inflation hedge assets. When real rates fall (nominal rates declining faster than inflation), the cost of holding commodities decreases, increasing their investment appeal. In terms of demand growth, as currencies of emerging market importers like China and India strengthen, their purchasing power increases and demand for commodity imports expands. Dollar weakness is also interpreted as a signal of global economic recovery, boosting demand for industrial metals such as copper and aluminum. GLD (SPDR Gold Shares ETF) holds physical gold and is well-suited as a hedge against both dollar weakness and inflation. Gold is at $2,050 per ounce, near the 2020 high of $2,070, and is attempting to break through $2,100 as the DXY has fallen to 102. Fed rate cuts lower real rates, reducing the opportunity cost of holding gold and increasing its investment appeal. Central bank gold buying provides additional support: China, India, and Russia are buying gold to diversify their reserves, and central bank purchases in the first half of 2025 totaled 300 tonnes, up +20% year-over-year. Gold also benefits from safe-haven demand during geopolitical stress. For GLD investment strategy, a 5–10% portfolio allocation provides both an inflation hedge and diversification benefits. Consider increasing GLD to 10–15% when DXY falls below 100. If gold breaks above $2,100, further upside to $2,200 is plausible. Use sharp equity market drops (10%+) as opportunities to add to GLD as a hedge against equity losses. When choosing between DBC and GLD: choose DBC for broad commodity exposure with diversification across energy, metals, and agriculture; choose GLD for a pure safe-haven focus and lower volatility; or combine them—DBC 60% + GLD 40%—for a balance of broad commodity exposure and the stability of gold as an inflation hedge. Use the rebalancing calculator to set target allocations for total commodities (e.g., 10%) and individual positions (DBC 6%, GLD 4%), and if dollar weakness drives commodity prices sharply higher and the allocation exceeds 15%, sell the excess to lock in profits. Use the asset allocation calculator to simulate commodity allocations of 5%, 10%, and 15% under dollar weakness assumptions (DXY at 100 vs. 95) to identify the optimal commodity weighting.
VXUS: Currency Diversification Benefits from Developed Markets
VXUS (Vanguard Total International Stock ETF) provides additional currency gains when the dollar weakens. VXUS invests across 8,293 stocks in developed and emerging markets including Europe, Japan, and Canada. Regional weights are roughly: Europe 40% (euro and pound exposure), Japan 15% (yen exposure), Canada 7% (Canadian dollar exposure), emerging markets 25% (yuan and rupee exposure), and other 13%, offering excellent currency diversification. With an average P/E of 14x, VXUS trades at a roughly 40% discount to the US market (23x), and its 2.8% dividend yield is more than double the US market (1.3%), making it attractive for income investors. The expense ratio is a very low 0.08%. Year-to-date through 2025, VXUS has gained +12%, but including the currency tailwind the real return is even higher. Dollar weakness affects VXUS by adding currency gains: if VXUS rises +10% in local currency terms and the dollar falls 5% against the euro and yen, the dollar-denominated return on VXUS increases to approximately +15.5% (including compounding). In 2025, VXUS delivered +7% in local currency terms and +5% from currency effects, for a total dollar return of +12%. In terms of currency diversification, the 40% European weighting benefits from euro strength, the 15% Japanese weighting benefits from yen strength, and compared with a US-only portfolio the currency risk is more diversified, providing some protection against dollar weakness. On valuation, VXUS at 14x P/E is approximately 40% cheaper than the US at 23x, leaving significant room for price appreciation. A revaluation of European and Japanese equities as earnings improve could drive further gains, and the 2.8% dividend yield—more than double the US at 1.3%—also makes it attractive from an income perspective. For investment strategy, a 20–30% portfolio allocation in VXUS provides both currency diversification and global equity exposure. Consider increasing VXUS to 30–40% when DXY falls below 100. Continued euro and yen strength would further boost currency returns. When US equities surge and VXUS falls below its target weighting, use rebalancing as an opportunity to add at lower prices. When choosing between VXUS and EEM: choose VXUS for stable currency diversification with lower volatility, anchored in developed markets; choose EEM to maximize exposure to high emerging market growth and currency appreciation; or combine them—VXUS 70% + EEM 30%—for a balance of developed-market stability and emerging-market growth. Use the rebalancing calculator to set a target VXUS allocation (e.g., 25%), and if dollar weakness drives VXUS above 30% of the portfolio, sell the excess to lock in gains. Use the asset allocation calculator to simulate VXUS allocations of 20%, 30%, and 40% under dollar weakness assumptions (DXY at 100 vs. 95) to quantify the currency diversification effect and identify the optimal international equity weighting.
Building a Dollar-Weakness Portfolio and Rebalancing
During periods of dollar weakness, investors should increase the weight of non-dollar assets. For a currency-diversified portfolio, a balanced allocation (suitable for investors in their 50s) might be: US stocks (VTI, SPY) 50%, VXUS 25%, EEM 10%, commodities (DBC, GLD) 10%, bonds 5%—achieving a 50/50 dollar-to-non-dollar balance. An aggressive allocation (40s) could reduce US stocks to 40%, increase VXUS to 30%, EEM to 15%, commodities to 10%, and bonds to 5%, raising non-dollar exposure to 55%. A conservative allocation (60s) might keep US stocks at 60%, VXUS at 20%, EEM at 5%, commodities at 5%, and bonds at 10%, prioritizing stability while maintaining currency diversification. Strategies by degree of dollar weakness: if DXY is between 102–100 (mild weakness), maintain current allocations and execute only quarterly rebalancing. If DXY is between 100–95 (moderate weakness), increase VXUS and EEM each by +5 percentage points and commodities (DBC, GLD) by +3 percentage points. If DXY falls below 95 (severe weakness), increase non-dollar assets to 70% of the portfolio and reduce US assets to 30% to maximize the benefit of dollar weakness. Rebalancing principles: using the quarterly review approach, rebalance if dollar vs. non-dollar allocations deviate more than ±10 percentage points from targets. For example, if non-dollar assets targeted at 50% rise to 60% due to currency effects, sell 10 percentage points' worth and reallocate to US assets. Using a currency-level trigger approach, adjust non-dollar allocations when DXY breaks out of a target range (e.g., 100–105). Increase non-dollar allocation by +10 percentage points if DXY breaks below 100, and reduce it by -10 percentage points if DXY breaks above 105. Deploy new cash contributions during DXY decline periods into VXUS, EEM, and commodities first. In the event of a sharp decline (VXUS or EEM down 10%+ due to sudden dollar strength), use the pullback as a buying opportunity, and also consider increasing non-dollar allocations when DXY spikes above 108. For a practical rebalancing example: start with a portfolio of KRW 100 million (VTI KRW 50M/50%, VXUS KRW 25M/25%, EEM KRW 10M/10%, DBC + GLD KRW 10M/10%, bonds KRW 5M/5%), with DXY at 108. After three months, DXY falls to 102, a decline of 5.6%: VTI +5% (dollar terms), VXUS +10% (local +5%, currency +5%), EEM +15% (local +10%, currency +5%), commodities +12% (price +7%, currency +5%). The portfolio grows to approximately KRW 108.37 million (VTI KRW 52.5M/48.5%, VXUS KRW 27.5M/25.4%, EEM KRW 11.5M/10.6%, commodities KRW 11.2M/10.3%, bonds KRW 5.1M/4.7%). The non-dollar weighting has moved to 46.3%, which is 3.7 percentage points below the 50% target but still within the ±10 percentage point band, so no rebalancing is needed. After six months, DXY falls further to 100, an additional 2% decline: VTI +10% (dollar terms), VXUS +18% (local +10%, currency +8%), EEM +25% (local +15%, currency +10%), commodities +20% (price +12%, currency +8%). The portfolio grows to approximately KRW 118.65 million (VTI KRW 55M/46.4%, VXUS KRW 29.5M/24.9%, EEM KRW 12.5M/10.5%, commodities KRW 12M/10.1%, bonds KRW 5.2M/4.4%). The non-dollar weighting is now 45.5%, 4.5 percentage points below the 50% target—still within the band, so no rebalancing is required. However, since DXY has fallen to 100 and entered the moderate weakness zone, you may want to consider strategically increasing VXUS and EEM each by +5 percentage points at the next quarterly review. Use the rebalancing calculator to set your target dollar vs. non-dollar allocation (e.g., 50:50) and individual targets (VXUS 25%, EEM 10%, commodities 10%), and check for deviations and DXY levels at each quarterly review. Use the asset allocation calculator to simulate portfolio returns and currency effects under dollar weakness scenarios (DXY 105 → 100 → 95) to derive an optimal currency diversification strategy and rebalancing approach.
Conclusion
Dollar weakness represents a core opportunity for global diversification. EEM benefits doubly from emerging market currency strength and economic recovery; commodities (DBC, GLD) rise on dollar weakness and as inflation hedges; and VXUS offers stable growth through developed-market stock undervaluation and currency gains. Use the rebalancing calculator to adjust your dollar vs. non-dollar asset weightings based on DXY levels, and use the asset allocation calculator to simulate the currency diversification effects on your portfolio so you can build an optimal global allocation suited to your currency risk tolerance.
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