One of the most widespread calls for 2016 is for the US dollar bull market to continue, with talk of the euro sliding below parity with the greenback . But it’s often worth questioning the consensus. Indeed, the dollar bull market could already be over. “There’s not much more juice to extract” from this trade, Ugo Lancioni of Neuberger Berman tells The Wall Street Journal.
For one thing, the dollar has already had a strong run, with the trade-weighted index up by 25% in the past 18 months; the euro tumbled from 1.40 to 1.05 in the year to April 2015. The bull case, moreover, rests on the idea that, as the Federal Reserve continues to raise interest rates, Europe and Japan will keep printing money, so the growing yield on US assets becomes ever more appealing.
But this has been clear for some time already, and so is probably already factored into prices. David Bloom of HSBC certainly thinks that this is the case, and reckons that markets are now going to start focusing on when rates will peak. The Fed has already signalled that hikes will be very gradual and that the key federal funds rate is likely to peak at a lower level than in previous cycles.
An environment in which investors are focusing on peak rates is “not singularly dollar bullish”, as Bloom notes. What’s more, any sign of the Fed having to loosen monetary policy would imply a sharp slide in the widely popular greenback. Bloom sees the euro recovering to $1.20 in 2016, from under $1.10 now.