Michael Arone, chief investment strategist for State Street Global Advisors’ U.S. Intermediary Business, doesn’t deny there is an overwhelming bullish sentiment on the dollar among investors.
But, he admits he’s skeptical that it will continue its meteoric rise. Arone suggests investors may be overestimating the potential growth of the U.S. dollar.
“According to the consensus, the sky’s the limit for the dollar,” Arone says. “Yet … I wonder if the conventional wisdom is wrong and how investors could be impacted if that’s indeed the case.”
In the past eight months, the U.S. dollar has appreciated on a trade-weighted basis faster than during any similar period since the end of Bretton Woods, the fixed exchange rate regime that held sway over global currency markets from 1945 through 1971.
“The dollar has climbed consistently higher since 2011, and I am now skeptical of the widely held view that it will appreciate significantly from current levels,” Arone writes in a paper, titled Uncommon Sense: A Contrarian View on the Dollar. “The recent, strong run-up in the currency’s value is a cyclical phenomenon, not a secular upturn, and as it starts to play itself out I am concerned some investors may get caught chasing performance.”
By contrast, a survey of hedge fund managers from Aksia found that 86% of managers polled expect the U.S. dollar to be the top performing currency in 2015.
While the U.S. dollar index is up 23% from its 2011 low, Arone wonders if the U.S. dollar’s strength will endure. He predicts the dollar rally may take a breather.
“I believe predicting currency fluctuations is a fool’s errand, but we do see incredibly lopsided sentiment on the U.S. dollar after its strong run,” he says. “When everyone is expecting something to happen, the consensus is often wrong. So, is now a good time to begin hedging on hedging?”
Arone looks at past strong dollar movements in the 1980s and 1990s — when U.S. dollar strength did endure — and compares them to today.
“The two big late-20th century upward moves in the dollar came in times of robust U.S. economic growth and relatively tight monetary policy,” he write. “Neither condition exists today.”