Yanni Angelakos, Head of Investment Insights, Nasdaq Capital Access Platforms
USD Directionality Has Far-Reaching Implications
- USD & U.S. equity daily return correlations hit their highest since 2003 in Q2 2025
- U.S. sectors with high foreign revenues & EM assets benefit from USD weakness
- Cryptocurrency & gold ETFs have also benefited from a weaker USD
Summary
The U.S. dollar (USD) has disconnected from U.S. rates’ trajectory amidst fiscal, economic, and trade policy concerns, as well as questions around the U.S.’s role on the global stage going forward. USD and U.S. equity returns moved in tandem during the second quarter of 2025, which contributed to the USD having its weakest first half return for a year since 1973. This resulted in the highest correlation of daily USD and U.S. equity returns in over 20 years (per Bloomberg data)—leaving the markets to contemplate whether the USD trades more as a risk asset rather than a safe haven at times.
Due to the rise of macro uncertainties and volatility YTD, both institutional and retail investor data showed increases in USD net short exposures and currency trading activity, respectively. From a fundamental perspective, a weaker USD favors those U.S. sectors and multi-national corporations with higher international revenue exposures—namely technology, materials, and communication services—while continuing to benefit emerging market (EM) equities. New (cryptocurrency) and traditional (gold) USD and inflation hedges have also benefited via strong ETF inflows.
Biweekly Chart in Focus: Rolling 30-day Correlation of U.S. Equity & USD Daily % Returns Hit Its Highest Going Back 20 Years in May 2025
Source: Bloomberg
Details
USD Has Diverted From Fundamentals YTD
Per the chart above, the rolling 30-day correlation of daily Nasdaq-100® and USD returns hit its highest level since April 2003 on May 12th—nearly 73%. The smoothed out, rolling 90-day correlation of daily returns reached 50% on July 11th, the highest since March 2020. By contrast, the long-term average correlation on both a rolling 30-day and 90-day basis is around -11%. Net-net: daily USD returns have historically been uncorrelated with daily U.S. equity returns as the USD tends to function as a hedge to risk assets. However, positive correlations of daily returns during the second quarter of the year suggest that the USD traded more like a risk asset than a safe haven at points amidst increased macro uncertainties and U.S. policy concerns.
While there are various factors which can drive currency directionalities and valuations—and modeling these is far from an exact science—at a high level, a country’s interest rate trajectory is a key underpinning for its currency. Specifically, interest rate differentials are drivers for currency pairs’ directionality. Figure 2 below shows the spread between German Bund and U.S. Treasury 2-year yields versus the EUR/USD. These series have tracked closely over the past five years. However, they have clearly disconnected for much of 2025. The culprit? Most likely concerns around U.S. fiscal, trade, and economic policies, with a sprinkling of U.S. monetary policy dynamics. The median Bloomberg forecast has EUR/USD at 1.21 in 2026, which would be the highest since mid-2021 and essentially put it at its 20-year average of 1.22. In the very near-term, investors will be watching the impact to the EUR/USD from the announcement on July 27th of a framework trade agreement between the U.S. and European Union.
Figure 2: EUR/USD Has Disconnected from Interest Rate Differentials YTD
Source: Bloomberg
Relatedly, the “Sell America” narrative prevailed in April amidst peak trade tariff pressures as total net foreign purchases of U.S. assets (across Treasury bonds and notes, equities, corporate bonds, and government agency bonds) were approximately -$50 billion. However, international demand rebounded significantly in May given the trade de-escalation as total net foreign purchases of U.S. assets topped $300 billion (per Apollo’s Chief Economist via U.S. Department of Treasury and Macrobond data).
On account of increased market volatility and U.S. macro uncertainties, the speculative institutional investor community (e.g., hedge funds, CTAs) pushed USD net short exposure to the highest level in more than four years which has tracked well with the DXY (Figure 3). Concurrently, their counterparts in the retail investment community displayed an increase in currency trading activity. Per Nasdaq’s Global Retail Foreign Exchange Flow data, in early 2025, global retail currency trading activity across all currencies reached its highest since September 2019.
Figure 3: Largest Speculative USD Net Short Exposure in Over Four Years
Source: Bloomberg
A Weaker USD May Favor Those U.S. Companies with Higher Foreign Revenue Exposures
The USD’s depreciation will be a key dynamic to monitor during the current Q2 2025 earnings season as a weaker dollar can benefit those companies who have a sizeable portion of their revenues coming from international markets. However, it can also increase the cost of imported goods. Coupled with early indications that the tariff effects are beginning to filter through to corporate America and the U.S. consumer (e.g., per the June CPI report: toy prices had their largest monthly increase since April 2021; sports equipment largest since January 2022; appliances the largest increase in almost five years), investors will be focused on the impact to U.S. corporate profit margins which remain elevated.
Given the gearing of, particularly, the Nasdaq-100 and the S&P 500 to mega cap technology companies which enjoy a massive global presence, Goldman Sachs notes that 45% and 28%, respectively, of these indexes’ revenues are generated from outside the U.S. This compares with 20% for the more domestically-geared Russell 2000 Index. Goldman estimates that a 10% drop in the trade-weighted USD tends to boost S&P 500 EPS by 2% to 3%. Per Figure 4 below, the technology, materials, and communication sectors have the greatest international revenue exposures.
Figure 4: S&P 500 Sector & U.S. Benchmark Index Revenue Share From International Markets
Sources: FactSet, Goldman Sachs. Notes: index figures as of 2024.
A weaker USD is not only a benefit to certain equities from a bottoms-up perspective, but tends to be synonymous with risk-on periods from a top-down perspective—a dynamic that has been overlooked as the YTD focus regarding the USD’s weakness has been on the aforementioned macro uncertainties and volatility. Historically during dollar weakness, capital tends to flow to other markets and to more cyclically-geared economies. As noted in our July 3rd piece, EM assets in particular tend to benefit from a weaker USD as, amongst other factors, 1) they can attract capital as investors seek higher returns elsewhere and 2) EM bonds denominated in USDs cost less to service. As proxies for expressing weaker dollar equity beneficiaries via U.S. multi-national corporations and EM equity exposure, Figure 5 shows the Invesco QQQ Trust (which tracks the Nasdaq-100) and iShares MSCI Emerging Markets ETF (EEM) versus the DXY.
Figure 5: QQQ & EEM vs. DXY YoY%
Source: Bloomberg
Digital & Traditional Gold Also Benefiting From a Weaker U.S. Dollar
Crypto currencies have also benefited as a form of “digital gold” given U.S. policy and federal deficit concerns, and more recently following the passage of the GENIUS Act which focuses on regulating stablecoins. The Nasdaq Crypto™ Index (NCIS™) (a benchmark for large cap crypto assets that are supported by institutional infrastructure) is higher by over 22% YTD compared to -9% for DXY. Broader cryptocurrency momentum is most evident via Bitcoin which recently set another all-time high of $120,000. This has driven the iShares Bitcoin ETF (IBIT) to take in nearly $20 billion YTD to push its assets under management to over $86 billion—making it the seventh largest iShares ETF after having only launched in January 2024. While not at all-time highs, Ethereum is higher by 140% from its April 8th lows and iShares Ethereum ETF (ETHA) has seen $5.8 billion of inflows YTD to take total assets to over $10 billion.
Gold, the more traditional hedge to dollar weakness and higher inflation expectations, has also set record highs this year and is hovering around $3,400 per troy ounce. SPDR Gold Shares ETF (GLD) has had nearly $8.6 billion of inflows YTD, taking its assets to nearly $103 billion. While traditional USD and inflation hedges such as gold will continue to be a consideration for investors’ portfolios, investors are increasingly exploring portfolio ballasts via other hedging vehicles (e.g., private market investments, real assets, cryptocurrencies) as the product set continues to evolve.
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