Advisors Muscle Up Client Portfolios as Dollar Weakens

It looks like the dollar has been skipping leg day at the gym.

With a confluence of issues driving down the value of the US dollar relative to other global currencies, financial advisors are left weighing the risks and opportunities facing clients, particularly fixed-income investors. According to the US Dollar Index, which measures the relative strength of global currencies, the value of the dollar has dropped about 10% over the past 12 months. This means the dollar is losing value relative to other global currencies, including the euro, the yen and the British pound. At a high level, a weaker dollar will make it more expensive for Americans traveling abroad. But for financial advisors focused on their clients’ investment portfolios here at home, seeing the dollar trend lower can signal a time for adjustments and reallocations of capital. 

“US investors positioning for a weaker US dollar may want to consider selectively adding non-dollar-denominated exposure through international developed and emerging market debt,” said Nick Srmag, senior portfolio manager at MAI Capital Management. “Historically, local currencies have had the tendency to appreciate when the dollar falls.”

The Incredible Shrinking Dollar

So why is the dollar weakening in the first place? The primary forces driving down the greenback’s value include falling interest rates, rising government debt, increasingly protectionist US trade policies and improving global economic growth. With so many factors to consider, Srmag said the best approach to portfolio allocation is to be “tactical and selective.”

“Adding foreign bonds and currency exposure can introduce additional sources of volatility to fixed income portfolios, which means this type of allocation is not without risk,” he said. “In emerging markets, high idiosyncratic risk can meaningfully impact outcomes if investors choose the wrong country, currency, issuer or structure.”

David Krakauer, vice president of portfolio management at Mercer Advisors, advised against trying to make “heroic bets” when navigating a falling dollar. “A simple market-cap-weighted global equity portfolio naturally tilts toward markets whose returns rise when the dollar falls,” he said. “It’s an elegant way to keep the portfolio globally balanced while letting currency translations work in your favor.”

In terms of embracing currency risk in fixed income when the dollar is sliding, Krakauer reminds clients that “bonds are often the portfolio’s stabilizer, not its thrill ride.” Introducing currency exposure to the fixed income side of a portfolio can come with its own challenges, which is why some advisors are sticking with the US dollar, even on its current trajectory.

The Buck Stops … Somewhere Else

Other advisors said they generally prefer to keep fixed income exposures denominated in US dollars. “While non-US dollar bonds can provide some diversification benefits, they typically introduce more volatility than return potential for most US-based investors, making them a less efficient choice within the fixed income portion of portfolios,” said Stephen Tuckwood, director of investments at Modern Wealth Management. “The added volatility of adding currency exposure to fixed income portfolios doesn’t often come with superior yields or better diversification.”

For some investors, the fluctuating strength of the dollar can be lost among the headline issues driving the decline. But for Alvin Carlos, financial planner at District Capital Management, the issue among clients is what the strength of the dollar says about America’s standing on the international stage. “Several clients have expressed concerns about the dollar,” he said. Carlos is using diversified international bond funds to hedge client portfolios against the weaker dollar.

“If the dollar weakens, the international bond fund will generate gains, assuming all else is equal,” he said. “Investing in international stocks is another great way to hedge against a weaker dollar.”

No Greenback Givebacks. Generally speaking, a weaker US dollar makes American exports more attractive, but the flipside is a higher cost for products imported to the US. “When the dollar weakens, it can ripple through your whole financial picture, especially your fixed income investments,” said Melissa Cox, founder of Future-Focused Wealth. “If you’ve got international bonds that are issued in another currency, a weaker dollar can actually help because those payments get converted back into dollars, and when the dollar is down, you end up with more,” she added. 

The other side of that story, Cox explained, is that a weaker dollar can also mean rising prices in the US. “When inflation heats up, the Fed may respond by adjusting interest rates, and rising rates usually means bond prices fall,” she said. “That can sting, especially if you’re holding longer-term bonds.” One solution, Cox added, is staying nimble.

“This doesn’t mean bonds are bad, but it does highlight the importance of diversification,” she said. “You can build in flexibility and that might mean shorter durations, some inflation protection or even layering in some international exposure.”

US Currency on a Clearance Sale. Diversification is also the message being highlighted by Joon Um, tax advisor at Secure Tax & Accounting. “A weaker dollar isn’t something to panic about, but it does change how fixed income should be thought about,” he said. “It’s a reminder that fixed income isn’t just about chasing yield; it’s about diversification, managing duration risk and making sure income actually lines up with real-world spending needs.”

Jim Shagawat, a partner advisor at AdvicePeriod, is also preaching a sense of calm, as opposed to any kind of portfolio overhaul in response to the shifting dynamics across global currencies. “A weaker dollar isn’t something most fixed-income investors need to react to aggressively, but it does change the backdrop,” he said. “I’m focussing less on currency forecasts and more on what bonds are supposed to do in a portfolio.”

Factoring in the likelihood of inflation and pressure on real returns, but also the potential for global economic growth and maybe lower interest rates down the road, Shagawat is “emphasizing short-to-intermediate duration, high credit quality and international diversification, rather than stretching for yields and making currency bets.”

“For most investors, the takeaway is simple: Stay disciplined, know the role fixed income plays and don’t let headlines drive changes that weren’t needed in the first place,” he said.