One of the biggest stories in global markets continues to be the epic rise of the US dollar against the world’s big currencies.
While it’s good news for importers, it’s bad news for exporters. It’s also rough on the US-based multinational companies that do a lot of business overseas. This is why the strong dollar is the No. 1 thing S&P 500 companies have been complaining about.
With the Federal Reserve on the verge of tightening monetary policy with higher interest rates, many economists think the dollar has room to go higher.
“Optimism on the dollar is widespread, and our house view is for further dollar strength,” Credit Suisse’s Andrew Garthwaite said in a new note to clients. He noted that a recent Credit Suisse survey revealed that 70% of investor clients expect the dollar to continue appreciating over the next 12 months.
But what if the consensus is wrong?
In his note — titled “Where could the consensus be wrong?” — Garthwaite identifies reasons why the dollar’s rally may be near its end.
Among other things, he found that history is not on the consensus’ side.
“The dollar has historically fallen after the first Fed rate hike; indeed, the first rate hike on the last 5 tightening cycles was associated with a dollar weakening by around 10% over the following 3 months,” he said.
Indeed, we can’t rule out the possibility that all of the dollar’s recent strength is actually the market already pricing in rate hikes.