The dollar lost about 8% in 2025: how much of that did your US ETF return quietly give back?
6 min read by Opthest
In 2025 the US dollar had one of its weakest years in decades: the dollar index fell on the order of 8%, and the euro gained close to 10% against it. If you’re a euro-based investor holding US stocks or a plain S&P 500 ETF, that number sat on top of whatever the US market itself did — and most people never separate the two. They look at “my US ETF” as one return, when it’s actually two returns multiplied together: what the underlying assets did in dollars, and what the dollar did against the euro. Nobody sends you a notification when the second one moves.
Why doesn’t a euro-denominated ETF protect you from the exchange rate?
Because “denominated in euro” describes the share class you bought, not what the fund actually owns. An accumulating S&P 500 UCITS ETF listed in euros still holds US companies priced and traded in dollars; the fund simply reports its net asset value in euros by converting at the prevailing rate every day. That conversion is not optional and not something the fund manager is trying to protect you from — it’s the mechanism itself. So your return in euros is arithmetically the US market’s return in dollars, combined with the dollar’s move against the euro over the same period. When the dollar falls, a flat US market can show up as a loss in your euro-denominated account; when the dollar rises, a flat market can show up as a gain. The “currency-hedged” share class of the same ETF is the one actually designed to strip that second factor out — and most retail investors don’t hold that version, often without having chosen to avoid it.
How much did currency actually move last year?
By a meaningful amount, and not a one-off blip. Estimates for 2025 put the trade-weighted dollar’s decline at roughly 8%, with one widely cited figure from TD Economics pointing to about an 8% fall overall and closer to 10% against major currencies specifically; separate commentary citing Goldman Sachs figures put the dollar index down around 8.4% for the year while the euro advanced near 9.8% against it. Those aren’t identical numbers — they come from different baskets and methodologies — but they agree on the size of the move: large enough that it rivals, and in some stretches of the year exceeded, the swings coming from the US stock market itself. A euro-based holder of unhedged US equities absorbed that currency move in full, on top of whatever the S&P 500 did in dollar terms.
Is currency risk something you can diversify away, or does it just add on top?
It depends on how it correlates with the rest of what you hold — exactly the same question this blog has covered for any other pair of assets. A weaker dollar sometimes coincides with stronger US equity markets (loose monetary policy tends to lift both risk assets and weaken the currency printing them), which would make an unhedged dollar exposure partly self-cancelling for a euro investor — losses on the currency leg offset by gains on the equity leg, or vice versa. WisdomTree’s analysis of the 2025–2026 period makes exactly this point: hedging has more diversification value specifically when the dollar is negatively correlated with US equities, and less when it isn’t. That correlation is not fixed — it shifts with the macro regime, the same way gold’s correlation to stocks shifted in the piece on gold’s broken 40-year pattern. Currency exposure behaves like any other risk factor in a portfolio: it has a measurable, time-varying relationship with everything else you own, not a fixed label of “safe” or “risky.”
Does hedging the currency actually make sense right now?
That’s a trade-off, not a free upgrade, and it has a price tag that changes over time. Currency hedging isn’t free or costless — its cost (or benefit) comes from the interest-rate differential between the two currencies, the “cost of carry.” WisdomTree’s March 2026 note argues that, given current rate differentials, hedging US dollar exposure back to euros has actually been paying investors a positive carry rather than costing them one — a reversal from periods when hedging was a drag on returns. Separately, Dodge & Cox’s January 2026 commentary takes the other side of the ledger: fully hedged portfolios give up the diversification and potential tailwind that comes from holding a currency that moves independently of your other assets, and they note the dollar, despite 2025’s decline, remains expensive relative to its own history — meaning a resumed rebound isn’t something to rule out. Both things can be true at once: hedging is cheaper today than it recently was, and hedging also removes a diversifier that sometimes helps you.
What does this mean for how you should actually look at a multi-currency portfolio?
That currency exposure deserves to be measured, not assumed away by the label on the fund’s share class. If you’re tracking returns in euros while holding dollar-denominated assets, your real risk picture includes the currency leg as its own component — with its own volatility and its own correlation to the rest of your holdings — not as an invisible rounding error. That’s the same discipline behind recomputing correlation and covariance on rolling data instead of trusting a textbook relationship, covered here for correlation generally: an input that moves on its own needs to be tracked on its own, in whatever currency you actually spend.
What this is NOT
This article isn’t telling you to hedge, not to hedge, or forecasting where the dollar goes next — Morningstar’s own 2026 analysis describes the dollar’s recent weakness as cyclical and policy-driven (slower US growth, narrowing rate differentials, persistent fiscal deficits) rather than evidence of a structural collapse, and reasonable analysts disagree on what comes next. The verified point is narrower: currency is a measurable risk factor sitting inside unhedged foreign holdings, it moved by a historically large amount in 2025, and whether hedging suits your own portfolio depends on inputs — correlation, carry cost, time horizon — that only you and your own numbers can answer.
The share class says “euro.” The exchange rate doesn’t ask what currency you’d prefer. Knowing which of your returns came from the market and which came from the exchange rate is the first step — what to do about it is a separate, personal question this article can’t answer for you.
Sources: Pound Sterling Live, “Good Target for Euro-Dollar” — Goldman Sachs dollar index and EUR figures for 2025; TD Economics, “The United States Dollar in 2025”; WisdomTree, “Reassessing the Global Currency Landscape Amid the Dollar’s Decline”; Dodge & Cox, “Global Bonds: Navigating a Weaker Dollar” (January 2026); Morningstar, “What a Weaker US Dollar Means for Investors in 2026 and Beyond”.