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Investors are now positioning themselves to capitalize on the U.S. dollar’s era of strength coming to an end, says the CEO of one of the world’s largest independent financial advisory, asset management and fintech organisations.
The comments from deVere Group’s Nigel Green come despite hawkish comments made Monday by a Federal Reserve official.
James Bullard stated that the U.S. central bank needs to raise interest rates further and then hold them throughout next year and into 2024 to tame inflation and bring it back down toward the Fed’s 2% target.
The deVere CEO comments: “The dollar regained some ground following the hawkish tone from the Fed official who set out the case for more rate hikes.
“However, it’s our experience globally that investors are now moving to position their portfolios to capitalize on the likelihood of the U.S. dollar’s era of strength coming to an end by mid-2023.”
He continues: “The minutes of the last Fed meeting give a ‘heads up’ about where the central bank of the world’s largest economy is headed. It seems that the Federal Open Market Committee (FOMC) is heading toward stepping down to a 0.5 percentage point increase in December, following four consecutive 0.75 percentage point hikes “Against this backdrop, investors are now trimming bets on aggressive Fed tightening as inflation is gradually tamed, which means the dollar will not be as attractive.”
The strength of the dollar, which is measured by the U.S. dollar index (USDX), is relative to other currencies.
“The greenback has been all-powerful this year, up around 14% compared to a basket of currencies, because it’s still considered a safe-haven in times of market volatility,” continues Nigel Green.
“Almost all relative economies have raised interest rates, the Fed has raised them far higher, implementing one of the most aggressive rate hike cycles in modern history – primarily because the U.S. economy could withstand it.”
Whilst a strong dollar can benefit U.S. consumers as it makes imported goods cheaper and international travel typically becomes less expensive, it can have negative implications too.
“For U.S. companies, including most on the S&P 500, a strong dollar hits their foreign profits when moved back into dollars, putting corporate earnings under pressure,” affirms the deVere chief executive.
“Plus, their international competitiveness is at risk, as American products become more expensive abroad. At the same time, U.S. financial assets, such as stocks and bonds, become less attractive to global investors.”
In addition, both developed and emerging markets globally have been hit by a powerful greenback as it fuels inflation and raises the cost of imported goods. It has also added to the need for some central banks around the world to tighten their own financial conditions.
He concludes: “Always looking ahead, investors are now seriously looking at other currencies as the dollar’s strength appears to be waning.”