The U.S. dollar is witnessing persistent downward pressure in 2025, with Fed interest rate cuts and economic instability increasing investor anxiety and weighing on the greenback’s outlook. According to TradingView, the U.S. Dollar Index (DXY) has fallen 0.70% over the past month and 8.73% year to date. The index has recorded an all-time decline of 17.38%.

Easing Policy Bets Put Pressure on the Greenback

The value of the greenback is closely related to the Fed’s monetary policies. Its value tends to move inversely with the Fed's interest rate adjustments. Interest rate cuts by the Fed make the dollar less attractive to foreign investors, as these weaken it.

According to the CME FedWatch tool, markets are anticipating an 89.4% likelihood of interest rates being lowered to 3.5-3.75% in its December meeting, a sharp rise from the odds just a month earlier. Expectations of further interest rate cuts in 2026 are another headwind for the greenback.

Additionally, if Kevin Hassett takes over as Fed chair once Jerome Powell steps down, interest rates could decline even more in the years ahead, putting more pressure on the greenback.

Dollar Feels the Strain as Investors Look Away from U.S. Markets

Volatility in the world’s biggest economy has comparatively decreased investor appetite for U.S. assets, exerting pressure on the country’s economy and the greenback. A redirection of funds away from the United States reduces demand for the greenback, weakening it as a result and reducing its value.

According to LSEG Lipper data, as quoted on a Reuters article, investors stayed cautious as rich mega-cap tech valuations pushed them toward safer assets, even with rate-cut growing expectations. U.S. equity funds saw another week of outflows, with investors pulling a net $3.52 billion in the week to Dec. 3, marking the second straight week of selling.

ETFs to Consider

Since currency markets are often driven by shifts in sentiment rather than traditional supply-demand fundamentals, a weakening dollar makes portfolio diversification and hedging even more essential for investors.

Investors can both hedge against a weakening dollar and tap into opportunities that thrive when the greenback slips by increasing their exposure to the following funds.

WisdomTree Emerging Currency Strategy Fund (CEW Quick QuoteCEW - Free Report)

WisdomTree Emerging Currency Strategy Fund employs an active strategy and provides exposure to various emerging currencies worldwide relative to the U.S. dollar, making it a quality fund to invest in.

The fund has exposure to the currencies of Hungary, Poland, Chile, South Africa, Mexico and Malaysia, which comprise the top six countries, among others. CEW has amassed an asset base of $11.5 million and charges an annual fee of 0.55%.

WisdomTree Emerging Currency Strategy Fund has gained 2.40% over the past three months and 12.54% year to date.

Invesco DB U.S. Dollar Index Bearish Fund (UDN Quick QuoteUDN - Free Report)

Invesco DB U.S. Dollar Index Bearish Fund offers exposure to a basket of currencies relative to the greenback, rising when the dollar depreciates. UDN is an appropriate option for investors with a bearish outlook on the U.S. dollar.

Invesco DB U.S. Dollar Index Bearish Fund has gained 0.43% over the past month and 10.70% year to date. UDN has amassed an asset base of $138.8 million and charges an annual fee of 0.78%.

Precious Metal ETFs

Interest rate cuts by the Fed and a weaker dollar make certain precious metals attractive. A weaker U.S. dollar generally leads to higher demand for precious metals, pushing their price upward as it becomes more affordable for buyers holding other currencies.

Per LSEG Lipper data, gold and precious metals commodity funds surged in popularity, pulling in a net $1.93 billion in the week to Dec. 3, their strongest weekly inflow in six weeks, as quoted on Reuters.

Funds like abrdn Physical Precious Metals Basket Shares ETF (GLTR Quick QuoteGLTR - Free Report) and Invesco DB Precious Metals Fund (DBP Quick QuoteDBP - Free Report) give broader exposure to precious metals.

Investors can also consider funds like SPDR Gold Shares (GLD Quick QuoteGLD - Free Report) , iShares Gold Trust (IAU Quick QuoteIAU - Free Report) , iShares Silver Trust (SLV Quick QuoteSLV - Free Report) and abrdn Physical Silver Shares ETF (SIVR Quick QuoteSIVR - Free Report) for more concentrated exposure to gold and silver, especially given their recent rally.

Emerging Market ETFs

A weakening greenback further fuels interest in global equity funds. The greenback's value tends to move inversely with interest rate adjustments by the Fed. Interest rate cuts by the Fed make the U.S. dollar less attractive to foreign investors.

According to LSEG Lipper data, as quoted on the abovementioned Reuters article, emerging market equity funds saw another strong week, attracting $3.11 billion in fresh inflows in the week to Dec. 3, marking the sixth straight week of net inflows. Additionally, the Dow Jones Emerging Markets Index has added 20.48% year to date and 0.42% quarter to date.

Investors can look at funds like iShares Core MSCI Emerging Markets ETF (IEMG Quick QuoteIEMG - Free Report) , Vanguard FTSE Emerging Markets ETF (VWO Quick QuoteVWO - Free Report) and iShares MSCI Emerging Markets ETF (EEM Quick QuoteEEM - Free Report) .