Few investors would currently bet against the US dollar continuing to rise. Economic growth is outstripping most other developed countries, the Fed might finally be able to raise interest rates next year and America’s current account deficit is shrinking fast.
All this as European and Japanese growth stalls. Their central banks favour a high dollar to assist their own recovery.
As JPMorgan Asset Management write in the Financial Times, history shows that major currency trends usually last once established so there’s no reason to expect the greenback to level off anytime soon.
Whilst this may harm US equity returns, it should indeed lead to stronger corporate profits in Europe. Evidence also suggests emerging markets might withstand this latest period of dollar strength better than before.
There is still a danger that the dollar’s strength could lead to a dangerous imbalance amongst the world’s biggest economies. But, as the FT story concludes, “the last time the US dollar rose sharply and the oil price collapsed it was the start of the great recession. The prospect of unbalanced global growth over the next year or so is a lot more attractive than no growth at all”.
There is also a good video from the FT explaining some of these trends see below.