Why The Dollar’s Strength Can Continue

The same pattern could repeat itself this time around.


Currency Performance

To be sure, for this cycle in particular predicting currency movements requires divining the behavior of the world’s major central banks. The process is further complicated by the fact central bank policy now includes unconventional monetary policies in addition to changes in interest rates.

That said, assuming the dollar continues to appreciate over the longer term, there are several implications for investors. A dollar that remains strong, albeit with some reversals, would put downward pressure on inflation and the earnings of U.S. exporters. Commodities are also likely to struggle in an environment characterized by a stronger dollar and rising real rates.

But further strength in the U.S. dollar would likely be good for equity markets that traditionally outperform on their currency’s weakness, such as Japan and the eurozone, as a stronger dollar will make their exports more competitive. Finally, the long-term strength in the dollar boosts the case for considering strategies that can help insulate an international equity portfolio from the impact of weak foreign currencies, such as currency hedged exchanged traded funds (ETFs).

Sources: BlackRock, Bloomberg

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock. He is a regular contributor to The Blog.

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