To be sure, a long list of positives argues for a strong dollar. Most
importantly, Trump’s policies could very well initiate stronger economic
growth, higher inflation, and higher interest rates – and hence an even
But beware consensus thinking! It has been a long period of outperformance
for the greenback. Several factors that drove the dollar higher are now
likely heading in reverse.
First, what expectations are priced into the dollar? After years of massive
outperformance, opinion is nearly universally bullish, bidding its value up
to hazardous levels. Now, like Icarus soaring too close to the sun, the
dollar’s wings may be melting. For example, in recent earnings outlooks,
CEOs have repeatedly cited the strong dollar as a headwind for growth. This
type of automatic “circuit breaker” ultimately leads to a weaker dollar.
Or consider Trump’s agenda for a manufacturing renaissance. To engineer
this, a weak dollar is crucial. A manufacturing boom without a weak
currency would be incredibly rare.
Trump knows this. Recently, his administration has been talking down the
dollar, complaining that “U.S. companies cannot compete” because of the
strong dollar. Expect this jawboning to continue.
Perhaps more importantly, consider investor expectations for growth outside
of the U.S. A big surprise in 2017 will likely be much stronger growth in
Asia and even Europe. Recent eurozone data continue to paint a picture of
accelerating activity, subdued core inflation, ongoing monetary
accommodation, and – most notably for investors – improving corporate
earnings (even France is participating in this cyclical upswing!). This
growth profile is underappreciated by most investors still fixated on
Trump’s protectionist agenda damaging global trade.
Looking ahead, capital will continue to reward the best macro stories
(particularly those with compelling valuations). Increasingly, these will
be found outside the U.S.
Like other asset classes, currencies have a history of heading into
extremes. The U.S. dollar could certainly move higher from here. But it is
a crowded place with enormously high expectations. Any indication of a
stumble could produce a great rotation out of dollars. Under that view, why
not play a global reflation story by buying Europe and Asia, regions that
have radically sharpened their competitiveness through currency debasement,
are showing signs of earnings and economic acceleration, and if one insists
on measuring valuation (in our post-modern world), trade on much cheaper
Tyler Mordy, CFA, is President and CIO for
Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities
selection. He specializes in global investment strategy and ETF trends.
This article first appeared in
Forstrong’s Gobal Thinking feature. used with permission. You can reach Tyler by phone at Forstrong
Global, toll-free 1-888-419-6715, or by email at
firstname.lastname@example.org. Follow on Twitter at
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