Just because markets think the Fed's done hiking doesn't mean the days of US dollar strength are over

Richard Lautens/Toronto Star via Getty Images

If financial markets are right, after three years and nine 25 basis point increases, the US Federal Reserve’s latest monetary policy tightening cycle is now over.

So will that signal the end of US dollar strength?

According to history, the answer is likely to be no.

As seen in the simple-yet-instructive chart below from Westpac Bank, rather than weaken the greenback, the end of a Fed tightening cycle usually sees the US dollar strengthen further.

Westpac Bank

Within 12 months of the last hike — on this occasion December this year if markets are right about the tightening cycle being over — the average gain in the broad US dollar index in prior cycles has been around 5%.

The only occasion it didn’t gain was the end of the prior tightening cycle from the Fed back in 2006. The four others have seen the dollar index rally.

So if history is any guide, it’s more likely than not that we could see gains in the dollar this year.

However, given we are talking about historic patterns, that comes with the disclaimer that past performance is not indicative of future returns.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.