The US Dollar Free Lunch Is Over. What Now?

Investors who are unhedged to the US dollar have enjoyed a long period of higher returns and lower risk. However, in 2025 the dynamics have changed. We believe this “new normal” will persist. In this piece, we discuss what’s driving this shift, and how it may affect Canadian investors’ hedging positions.

Over a decade-long bull market, the US dollar’s real value increased against a broad range of currencies. Solid relative GDP growth and exceptional corporate earnings growth supported strong capital inflows, high US interest rates relative to other major countries, and the widespread view of the US dollar as a safe haven. The US Federal Reserve’s broad trade-weighted US dollar index rose 46.1% from its trough in 2011 to its peak in January 2025. For much of this period, the dollar also enjoyed historically negative correlations to risky assets.

However, it is exceptionally difficult for us to see how the performance of the last 15 years can persist for the next 10 to 15 years — or even the next three to five. We believe this US dollar free lunch era is over.

In fact, we believe the US dollar is headed toward a multiyear bear market that will see it underperform most global currencies. In addition, we expect the US dollar’s negative correlation with equity markets to diminish, as investors’ perception of the dollar as a safe haven weakens.

As a result, investors should consider hedging more of their global portfolios, including both equity and fixed income. Canadian investors in particular should hedge the US dollar aggressively based on our outlook.

Learn More About the Impacts on Canadian Investors by Downloading the Article
The Canadian economy is subject to three major headwinds that threaten a mild recession or at least near stagnation over the course of 2025 and into early 2026:

• Higher US tariffs mean lower demand for Canadian goods.
• Tariff uncertainty prompts lower consumer spending and lower business capex.
• Slower US growth reduces demand for Canadian products, even in sectors not hit by tariffs.