The US dollar has been getting stronger, but at what point is it just too much for the market to bear?
In short, there’s no simple answer.
The dollar on a global trade-weighted basis has strengthened by about 20-25% over the course of the last year. In the weeks following Trump’s presidential victory, the dollar had one of its sharpest rises ever against a basket of peers – and is now up more than 40% from its 2011 low.
In a research note published on Wednesday, Goldman Sachs Asset Management said the US dollar is overvalued versus its peers.
Additionally, a Bank of America Global Fund Manager survey found that in February, more investors than at any point in the past decade believe the dollar is overvalued, with 41% of managers citing being long the US dollar as the “most crowded trade.”
What’s causing the rally?
The latest rally in the dollar has been a bet on the economic policies of the Trump administration.
Proposed policies of tax cuts, fiscal stimulus, and increased infrastructure spending make way for furthering tightening by the Federal Reserve. At its December meeting, the Fed indicated it sees three rate hikes this year. When the Fed increases the fed funds rate, it normally reduces inflationary pressure and works to appreciate the dollar.
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