Dollar growth picked up when the US central bank, the Federal Reserve, raised interest rates after the wave of inflation that followed the zero interest rate level during the pandemic. According to strategists, the stronger dollar should be one of the factors that negatively affected stocks in 2022, when the dollar rose 8 percent while the S&P 500 fell by almost a fifth of the index’s total value. It is the sharpest fall since the financial crisis in 2008.
Step on the same drivers
According to the FT, the American stock market has been able to digest the strengthening of the dollar rate as the strengthening was not as steep as in 2022. According to Karim Chedid, who heads investment strategy at iShares Emea in Blackrock, several of the largest central banks, including the Federal Reserve, look to move from a tightening to an easing, unlike in 2022 when interest rates were still on the rise.
“We are at the top of the interest rate cycle. Yes, expectations have been pushed back, but we still expect the rate cut cycle to begin,” Chedid commented to the paper.
Binky Chadha, head of global strategy at Deutsche Bank, says it appears that stocks and the dollar have unusually moved higher on the same drivers in recent months.
“Better US growth means a better outlook for US earnings and stocks, but it also means higher US interest rates, fewer rate cuts and a stronger dollar as growth elsewhere has been weak,” he said, according to the FT.
Option for other stock markets
However, some strategists warn that the stock rally may not be able to withstand the dollar’s strength much longer.
“Earnings are pretty decent at the moment, but if this condition continues, it could start to get a bit more complicated,” said Kevin Thozet, a member of the investment committee at French asset manager Carmignac.
“A stronger currency makes US goods and services less competitive internationally,” Jack Ablin, chief investment officer at Cresset Capital told the FT.
The newspaper further writes that a break in the US stock market could give other stock markets an opportunity to catch up with the US.
“We may find ourselves in a period where markets outside the US can finally outperform,” Andrew Cole, head of multi-asset portfolios at Pictet Asset Management, is said to have stated.
