Dollar Weakness, US Stocks Lag, and Commodities Poised to Outperform in 2025’s Global Asset Shifts
A front-line flare-up between Israel and Iran produced real-time cross-asset signals that illuminate the likely path for markets in the second half of 2025. Despite the intensity of the 12-day conflict, the dollar showed unusual resilience in some respects, while the US Treasury market did not rally as a traditional safe haven, and oil prices traced a volatile but ultimately non-disruptive arc. Taken together, these dynamics point to a broader and risk-managed rethinking of global market leadership, with implications for portfolio construction, asset allocation, and risk management. In short, the episode underscored a potential shift in the balance of power among major asset classes and regions, a trend that could reshape investment strategies over the coming months.
Market Pulse During the Israel-Iran Conflict
The first striking observation was how the US dollar behaved during the conflict’s peak. Across roughly two weeks of heightened tension, the dollar did not stage a decisive rally, even as geopolitical headlines intensified. The DXY dollar index notably traded near a three-year low around the time Israel intensified operations against Iranian nuclear facilities on June 13, yet the currency did not strengthen in a way that traditional risk-off episodes would have suggested. This atypical behavior hints at a broader re-assessment of the dollar’s role as the ultimate safe-haven asset, or at least a recognition that other factors were influencing demand for dollars.
A second notable dynamic was in the US Treasury market. Despite the risk-off environment that often accompanies geopolitical shocks, Treasuries failed to consistently catch a bid. In the immediate aftermath of the initial strikes, the 10-year yield rose by about 10 basis points before retreating. Since then, yields have moved lower again, but the retracement appears more connected to ongoing Federal Reserve dynamics and policy expectations rather than the mood of the conflict itself. This divergence between elevated headlines and a muted Treasury rally underscores a broader reconsideration of the bond market’s sensitivity to geopolitical risk, at least in the context of today’s rate regime and macro-sentiment.
Oil, as expected, presented a more mixed narrative. Prices initially jumped by roughly 15% in the wake of renewed fighting, reflecting supply fears and geopolitical risk premia. Yet the momentum did not persist; prices tumbled back toward pre-conflict levels as the market assessed the probability of sustained, material disruptions to supply. The narrow outcome—a spike followed by a retreat—illustrates how quickly oil can react to shifting geopolitical assessments and how market fundamentals can reassert themselves even amid fear.
From a broader perspective, these three channels—FX, fixed income, and energy—formed a nuanced mosaic rather than a clear, one-way narrative. The lack of a definitive safe-haven bid, a non-traditional Treasuries response, and a temporary but contained oil reaction collectively suggested that the episode might be more about recalibrating risk premia and growth expectations than about a structural shock to global liquidity.
In this context, the market takeaway centered on the evolving nature of safe-haven status and the potential for a more nuanced, multi-asset approach to risk management. Investors began to recognize that the traditional flight-to-safety playbook could be less reliable when global capital flows are already being influenced by more complex, multi-polar macro dynamics. The combination of a volatile but contained oil path, mixed bond behavior, and a non-escalatory dollar response pointed toward a growing recognition that safety nets are no longer homogeneous or universally applicable across asset classes.
Implications for the US Dollar and Safe-Haven Dynamics
The episode helped crystallize a broader, increasingly cited view: the United States may no longer be the unquestioned global safe haven or the archetypal market firefighter. Instead, the period under review suggested that, in certain circumstances, American policy or market behavior can contribute to volatility or risk rather than contain it. This reframing aligns with a larger, semi-permanent shift in how investors perceive risk, liquidity, and the destination for capital during episodes of stress.
A key aspect of this shift is the underperformance of US stocks relative to non-US equities. Through the first half of the year, the MSCI ACWX index, which tracks non-US developed and emerging market equities, posted gains exceeding 13% year-to-date, while the S&P 500 rose by roughly 1% in the same period. The divergence is more than a momentary anomaly; it signals a potential redefinition of leadership in global equity markets. If this pattern persists, the implication would be a more durable tilt toward non-US markets and a broader reallocation of capital away from the United States, with wide-ranging consequences for currency dynamics, capital flows, and policy expectations.
The dollar’s behavior in this framework is equally instructive. The broad-dollar index has shown signs of weakness, with estimates suggesting the greenback was down about 10% year-to-date. Such a backdrop of dollar softness could act as a tailwind for regions and assets priced in dollars, including commodities and many emerging-market asset classes. A weaker dollar tends to boost foreign demand for dollar-denominated assets by improving the relative value proposition for investors holding non-dollar assets, thereby fueling demand for non-US equities, global credit, and other risk assets.
A notable implication drawn by market participants is the potential for a secular reshaping of global equity leadership. If the leadership tilt toward Europe and Asia persists, it could reinforce a broader risk-off to risk-on regime that favors diversified strategies rather than a single-market concentration. In this context, professional forecasters and strategists have pointed to a portfolio approach that blends non-US equities with corporate credit and commodities. This combination appears to have outperformed plain US equity allocations in the year to date, reinforcing the idea that broad diversification can mitigate the concentration risk tied to a single geography.
The evolving narrative also carries implications for currency strategy and policy interaction. A weaker dollar generally supports higher global growth impulse through more favorable financing conditions in emerging markets and a more competitive export environment for other economies. However, it can also complicate the policy calculus of the Federal Reserve, particularly if it translates into higher inflation or triggers a shift in monetary conditions that dampens domestic demand. The balance between dollar weakness, inflation dynamics, and monetary policy remains a delicate one, with important implications for asset allocation across stocks, bonds, and real assets.
Global Equity Leadership: A Potential Shift in Market Dynasties
The observed relative performance gap between US and non-US equities has sparked renewed discussion about secular shifts in market leadership. The year-to-date outperformance of non-US equities relative to the US market hints at a broader re-pricing in which global growth dynamics become a more dominant driver of returns than a purely US-centric narrative. This potential shift is particularly significant given the traditional dominance of the US equity market in global portfolios and the long-standing belief in the resilience and diversity of the US economy.
A telling data point is the performance gap between the MSCI ACWX index and the S&P 500, which indicates a broader appetite for growth opportunities outside the United States. If such a leadership transition proves durable, investors may need to recalibrate expectations for passive and active strategies alike, with increased emphasis on regionally balanced portfolios that capture growth in Europe, Asia, and North America. This could also influence sector allocations, with more emphasis on global cyclicals, international earnings growth, and multinational exposure rather than domestic-only momentum.
The market commentary suggests a potential alignment with a broader macro thesis: a return to a more globalized growth cycle that benefits diversified exposure across regions and asset classes. In this framework, investors may increasingly value exposure to non-US equities as a core component of core portfolios, complemented by tactical allocations to credit and commodities to navigate inflation, rate moves, and growth acceleration in different parts of the world. The convergence of these forces would imply a re-pricing of risk premia that rewards cross-border diversification and a willingness to endure currency and geopolitical complexity for access to growth impulse in Europe and Asia.
Commodities: Re-Entering the Spotlight in a Global Growth Context
One of the most consequential threads in the cross-asset narrative is the potential rekindling of commodity strength as a driver of performance in the second half of the year and beyond. Commodities have historically been sensitive to global growth signals, and the current backdrop—characterized by improving growth surprises in Europe, a global acceleration thesis, and dollar dynamics—offers a compelling setup for a commodities-led impulse.
The evidence begins with growth signals: the Citi Global Economic Surprise Index has recently moved higher, with Europe among the leading contributors. This suggests that macro indicators are beating expectations in key economies, which bodes well for commodity demand tied to industrial activity, energy, base metals, and related sectors. If growth surprises sustain, commodity prices could receive a fundamental tailwind that offsets some of the volatility seen in other risk assets.
A related point is the policy stance around nominal GDP and debt dynamics in the United States. In a recent public relay, Treasury Secretary Scott Bessent outlined that the administration’s aim is to keep nominal GDP growth above the level of interest rates, thereby stabilizing the debt burden and reducing the risk of a near-term recession. While this framework is subject to political and economic shifts, it lays out a path where growth supports corporate earnings and global demand, indirectly benefiting commodities through broader activity and investment.
Another structural consideration is the so-called TriPolar World, a framework that envisions three major nodes of growth and demand: Europe, Asia, and North America. If these three regions can sustain growth and increase expenditure, the global growth impulse would be sustained, and commodities—especially energy and industrial metals—could benefit from higher throughput, infrastructure spending, and productivity gains. Such a growth environment would be highly supportive for commodity demand and pricing, given that many commodity contracts are priced in dollars and would respond positively to a weaker dollar and stronger global demand.
A weaker dollar itself serves as a critical accelerator for commodity demand. When the dollar depreciates, many commodity prices denominated in dollars become cheaper in other currencies, which tends to boost global consumption and investment in commodity-intensive activities. This dynamic can help fuel purchases of raw materials, equipment, and energy, creating a reinforcing loop that supports commodity markets and related equities.
The investors’ eyeing of the commodity complex is not naïve, however. Commodities may lag if policy missteps or economic policy uncertainty weighs on global growth. In particular, the policy volatility associated with the Trump administration’s approach to economic policy could introduce a degree of policy risk that weighs on markets and dampens the growth impulse. There are concerns that unpredictable policy actions could hinder global growth or create volatility that disrupts commodity demand. Yet, there is also the possibility that the administration’s actions could stabilize markets by providing clarity and a path to growth through deleveraging and demand-side stimulus, depending on how policy is implemented.
From a technical standpoint, commodities have shown signs of breaking out. The S&P GSCI index briefly surpassed a key hurdle around 580, coinciding with the intensifying Middle East tensions. That breakout, if sustained, could validate a broader rotation into commodities that investors have historically used as a hedge against inflation and as a source of diversification when equities underperform. The mining sector’s share of global stock market capitalization, hovering around a record-low of roughly 1%, underscores a potential supply-side and thematic reallocation that could accompany a commodity-led rally. While some of this could be a function of shifting risk appetite, the fundamental backdrop—growth, dollar dynamics, and policy signals—supplies a grounded case for a commodity revival.
Despite the favorable setup, risk remains. The impact of the ongoing geopolitical environment on supply chains, energy markets, and global growth is inherently uncertain. A intensification of Middle East tensions could reassert energy risk premia and feed through to inflation expectations, complicating the path for commodity gains. Conversely, if policy shifts in the United States stabilise growth and reduce policy noise, the environment could become more conducive to a sustained commodities rally. In either scenario, the cross-asset moves observed recently point toward a regime where fundamental and technical indicators are aligning in ways that could favor commodities as an essential component of diversified portfolios.
In summary, the commodity thesis rests on a confluence of stronger growth signals, dollar dynamics, and policy expectations that collectively offer a compelling setup for a commodity-led phase in the latter half of 2025. The alignment of macro surprises, currency movements, and technical breakout patterns signals to investors that commodities may be poised to outperform other major asset classes in this evolving global backdrop.
Dollar Dynamics, Emerging Markets, and the Policy Space
As the global growth narrative evolves, the interplay between dollar strength, emerging-market policy space, and global liquidity becomes increasingly important. A weaker dollar not only boosts demand for dollar-denominated commodities but also provides central banks in emerging markets with room to ease policy without triggering adverse exchange-rate shocks. When emerging-market economies have policy space, they can pursue rate cuts and stimulus that support domestic growth, which in turn sustains global demand for goods and services and bolsters commodity demand. This creates a more supportive backdrop for a multi-asset allocation that includes both international equities and real assets.
The potential for ongoing dollar weakness is intertwined with capital flows. If the trend toward non-US equity leadership continues, foreign investors may reallocate portions of their portfolios away from the dollar and into international assets. In this scenario, the dollar’s decline becomes both a consequence and a driver of cross-border investment activity. The precise path of the dollar will likely hinge on a complex set of factors, including global growth momentum, inflation, and the Federal Reserve’s policy trajectory. Nevertheless, the current trajectory—an index down year-to-date and a broader re-pricing of risk premia—supports the case for a more diversified, global portfolio approach.
From a strategy perspective, this environment encourages investors to consider a balanced framework that blends non-US equities, robust credit exposure, and commodities. This combination could capture growth in Europe and Asia, while leveraging the potential upside in commodity markets that arises from stronger global demand and dollar softness. Such a portfolio would also be positioned to navigate potential volatility in the US equity market, as leadership shifts toward a broader, multi-regional growth paradigm.
Technical Outlook, Valuation Footprints, and Investor Takeaways
Technically, the market has shown a readiness to re-price risk in a multi-asset framework. The recent cross-asset moves have suggested that fundamental expected growth and technical momentum are becoming more synchronized, a condition that can yield more durable outcomes than a purely narrative-driven rally. Investors should monitor how the cross-currents among growth signals, policy expectations, and currency trends interact with the technical trajectory of key indices, such as the S&P GSCI and major equity benchmarks.
Valuation considerations matter in this shifting landscape. Commodities have historically lagged equities in long-run performance, but the current dynamics show a potential uptick in relative performance for the commodity complex. The S&P GSCI’s recent move beyond key levels indicates growing investor interest, though it remains essential to assess how supply constraints, demand growth, and geopolitical risk could influence future price action. The mining sector’s outsized underweight in the broader market cap also signals potential upside in a scenario of rising demand for raw materials, though mining equities carry idiosyncratic risks tied to project costs, regulatory environments, and supply chain variables.
Investors should also assess the policy backdrop and its potential influence on risk appetite. While some elements of policy—such as efforts to keep nominal GDP growth above interest rates—could support a stable growth path, political developments, regulatory changes, and fiscal policy shifts could introduce volatility. The possibility that the dollar’s strength or weakness could alter foreign capital flows adds another layer of complexity to asset allocation decisions. In this context, diversification remains a prudent approach, particularly for those seeking to balance growth, inflation protection, and downside risk.
For practical portfolio construction, consider a framework that emphasizes non-US equities as a core component, complemented by a broad credit sleeve and a dedicated allocation to commodities. The diversification across regions and asset classes can help capture growth opportunities outside the United States while providing ballast against domestic risks. Regularly reviewing macro indicators, currency trends, and geopolitical developments will be essential to adjust exposures in response to evolving conditions.
Risk Considerations and Forward View
It is important to acknowledge the uncertainties that accompany these dynamics. The potential for renewed geopolitical tensions in the Middle East remains, and such developments could reintroduce energy-market volatility and broader risk premia. At the same time, policy articulation in the United States and elsewhere could take unexpected turns, influencing growth trajectories and the relative appeal of different asset classes. The balance of dollar strength, global growth signals, and cross-asset correlations will continue to shape market behavior in meaningful ways.
While the path ahead is uncertain, the cross-asset signals observed during the latest cycle suggest a regime in which leadership is shifting away from a US-centric framework toward a more distributed, global framework. This shift could potentially redefine investment priorities for large institutions and individual investors alike, with an emphasis on diversification, hedging, and strategic exposure across regions and asset classes. In practice, this means staying attuned to macro surprises, currency dynamics, commodity cycles, and the evolving balance between growth and inflation in key economies.
Conclusion
The Israel-Iran conflict episode provided a rare, real-time glimpse into a changing global asset framework. The currency, bond, and commodity responses pointed toward a potential rebalancing of global leadership away from the United States and toward a more diversified, multi-regional growth paradigm. A weaker dollar, coupled with a blended portfolio approach that includes non-US equities, credit, and commodities, emerged as a prudent strategy for navigating the second half of 2025. Commodities, in particular, appear poised to benefit from stronger growth signals, dollar dynamics, and supportive policy ideas, presenting a compelling case for renewed attention to this fundamental asset class. As market dynamics continue to unfold, investors should maintain a disciplined, diversified approach that preserves optionality and resilience in the face of evolving geopolitical and macro risks.
