The greenback’s recent rally could have legs.
The U.S. dollar is lighting up the charts, rallying for the past ten weeks (see the chart). That’s the greenback’s longest winning streak since mid-2014 when it went on a 12-week tear.
One major driver of the dollar’s recent strength versus other currencies is the U.S. economy’s relatively strong outlook. Inflation has come down faster here than in Europe, giving the Fed greater monetary policy flexibility and enhancing demand for dollar assets. Conversely, last week’s unexpected decisions by the Bank of England and the Swiss National Bank to hold their interest rates steady despite stubbornly high inflation highlighted the challenge those nations (along with others that are net importers of energy) face in striking a balance between bringing down high prices and fostering economic growth.
We believe the general recent outperformance of U.S. equities over foreign stocks could potentially continue for some time, given the relative strength of the economy and because the 50-day average on the ICE U.S. Dollar Index recently rose above the index’s 200-day moving average—a technical signal suggesting further upward momentum to come. That said, we remain watchful for signs of deterioration in the U.S.’s growth prospects versus the rest of the world’s, which could cause the dollar to reverse course and prompt a shift in our geographic equity allocation.
This commentary is written by Horizon Investments’ asset management team.
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