Ray Dalio on Currency Risk, Equity Returns, and the Real Drivers of 2025 Markets

Markets in 2025 rewarded investors who looked past headline index levels and focused on what actually drove real purchasing power. The most important lens was currency, because, as Ray Dalio writes on a recent post on X, “When one’s own currency goes down, it makes it look like the things measured in it went up.”

That framing explains why nominal equity gains felt impressive while real outcomes varied sharply depending on the unit of account. Equity returns that appeared strong in dollars looked far less compelling when translated into harder measures of value.

Dalio underscores why this distinction matters by noting, “What happens with the currency matters a lot to shifts in wealth and what happens economically.”

For investors, that statement cuts to the heart of asset allocation. Equity selection alone was not the dominant driver of outcomes; currency exposure and hedging discipline played an equally decisive role.

It is why he stresses, “Whether or not you are currency hedged matters a lot.” In an environment shaped by aggressive fiscal and monetary actions, ignoring currency risk was itself a directional bet.

The same logic applied to fixed income. Dalio reminds readers, “As for bonds—i.e., debt assets—because they are promises to deliver money, when the value of money goes down, their real worth is lowered even as their nominal prices rise.”

That dynamic helps explain why traditional safe assets disappointed many investors who focused only on coupon income and price appreciation, without adjusting for erosion in real value.

Equities outside the United States also told a powerful story. Dalio observes, “Clearly, investors would have much rather been in non-US stocks than in US stocks, just as they would have preferred to be in non-US bonds than in US bonds and US cash.”

Capital flows reflected that preference, reinforcing a longer-term trend toward diversification and away from concentration risk.

Looking ahead, valuation discipline becomes critical. Dalio writes, “When I calculate expected returns based on where stock and bond yields are using normal productivity growth and the profits growth that results from it, my long-term equity expected return would be at about 4.7% (a sub-10th percentile reading), which is very low relative to existing bond returns at about 4.9%, so equity risk premiums are low.”

That sober assessment challenges complacency built on recent performance. As he adds, “All this means that there isn’t much more return that can be squeezed out of the equity risk premiums, credit spreads, and liquidity premiums.”

Liquidity conditions also played a major role. According to Dalio, “These changes supported the prices of assets that do well in reflations, especially those with long-durations, like equities and gold, so now these markets are no longer cheap.” Investors chasing past winners may therefore be buying assets that already discount generous assumptions.

The takeaway is not to abandon risk, but to recalibrate expectations. As Dalio summarizes, “In summary, just about everything went up a lot in dollar terms because of the big fiscal and monetary reflationary policies and are now relatively expansive.”

In that setting, selectivity, diversification, and humility about forward returns matter more than bold narratives. As he concludes on positioning, “I do want to help you invest well,” which, in this cycle, likely means focusing less on what went up last year and more on what can still compound real value from here.

You can read the entire post here:

Ray Dalio Post on X – 2025