BCA: Why the Dollar’s Surge, Now Ebbing, Will Resume—After Some Tumult

The U.S dollar had been on a tear since 2021—when a ballooning American stock market attracted foreign investors—and through much of this year, amid international instability that highlighted the greenback’s refuge status.

But that advance has reversed lately, given worries about higher inflation and a possible recession besetting the world’s largest economy: While the buck is still up 16% since January 2021 against a basket of other major currencies, it has slid 9.5% since its peak in September. This is important to allocators and other investors with foreign holdings, as a strong dollar crimps their performance when translated into U.S. money.

The dollar downturn is temporary, say the sages at BCA Research. The U.S. Dollar Index, which tracks the denomination, is almost at 105, and the firm believes it is entering a volatile trading pattern for the next three months or so. On the other hand, the dollar will not go any lower than 102, nor any higher than 109 in that period, the BCA report contends.

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During the three-month spell, ever-higher U.S. interest rates will pull down the nation’s stock market and harm its economy, BCA predicts. Indeed, the report states, That overseas investment money, of course, is needed to pull up the dollar.

If a recession arrives in the U.S., which many expect in the coming year, the Federal Reserve will have more leeway to cut interest rates than its counterparts in Europe and Japan, which have lagged behind in tightening. Once the Fed eases rates, happy days will be here again for the dollar, the researchers say.

The BCA note declares: “Once we have clarity on 1) a bottom in global growth, 2) easing geopolitical tensions and 3) lower interest rates from the Fed, the dollar will peak. … This secular peak in the dollar will be supported by the most expensive valuation in decades, a consensus that remains very much bullish.”

It’s that interim period, essentially 2023’s next quarter, when things will be tricky, in BCA’s view. Next year, the best currency trade likely will be to short the euro and the Japanese yen, which should dip in relation to the buck, per BCA. Aside from the dollar, the best currencies to go long on are from oil-producing countries. Presumably, that implies that oil will reverse its current downtrend. BCA’s top pick: the Norwegian krone.

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Tags: BCa Research, dollar, euro yen, Federal Reserve, Interest Rates, krone, oil and gas, Stocks, U.S. Dollar Index

Stefan Strein, CIO at the Cleveland Clinic, during a panel discussion at CIO’s 2022 Influential Investors Forum, said deglobalization is his primary geopolitical concern because of its potential to reverse gains made in the battle against inflation.

Deglobalization “touches every facet of the economy,” Strein said. “It’s going to be really interesting over the next couple of years, especially as we deglobalize and potentially fragment into various factions around the world.”

The potential for deglobalization, stemming from the Russia-Ukraine war, U.S.-China tensions and China’s political and economic trends, were among other top geopolitical issues asset allocators mentioned as having a potential impact on portfolios.

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Amidst pressure to deglobalize, countering inflation remains a priority throughout global markets. Jeremy Wolfson, CIO of the $20 billion Los Angeles Water and Power Employees’ Retirement Plan, highlighted that the low-inflation environment that defined the U.S. economy from the mid-1980s through 2007 featured a straight line of increasing globalization.

Over the past decades, “we got to a point of hyper-globalization,” Wolfson said. “If you look at import-and-export prices as a percentage of GDP, they’re starting to plateau and roll over. Those trends [signaling increased deglobalization] are obviously challenging institutional investors. We’re coming out of that hyper-globalization trend that we’ve seen for some time.”

The Russia-Ukraine war prompted many questions about energy and security in the West.

In reference to divesture of Russian securities in institutional portfolios after the invasion of the Ukraine, Wolfson said, “[as a public plan, the first step] was disclosure. Thankfully, we had already positioned ourselves a little bit out of the space when all this kind of came about. We did have to write a little off, and we provided information to the city council’s office. Our board really looked at their fiduciary responsibility, and at the end of the day, they took that to heart, so they told the mayor, and the council, that we’re very responsible, that we understand social issues and that it’s a human tragedy.”

At the focal point of geopolitical security is energy security, as highlighted by the Russian invasion of Ukraine. A move toward renewables and the revolutionization of world auto fleets provide avenues toward energy security.

Strein pointed out that limiting carbon output by increasing the use of electric vehicles requires cooperation among economic regions.

“Minerals for battery technologies are quite dispersed, though most of the production is done in China,” Strein said. “Unless we all are going to be driving Chinese cars in the next 20 years, we have to figure out a way to get some of these metals processed here in the United States or North America.”

U.S.-China relations are another important part of any conversation about deglobalization.

Jonathan Glidden, managing director of pensions at Delta Air Lines, which sponsors a currently frozen, but fully funded $16 billion defined-benefit plan, in addition to a $26 billion 401(k) plan, provided perspective on how different the business relationship between the U.S. and China has been since its 2001 membership in the World Trade Organization.

The evolution of China, economically and politically, has considerable influence on businesses throughout the world, Wolfson described.

“It used to be that China was run by nine people; now it is really just run by [Xi Jinping, general secretary of the Chinese Communist Party],” Wolfson said. “They tried to convert themselves into a consumption economy, going from a more export-related economy, but their emerging salaries are [now] at the top of the emerging environment. It is not as cheap as it was to produce in China as it used to be.”

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Tags: deglobalization, geopolitical, geopolitical risk, Jeremy Wolfson, Jonathan Glidden, Stefan Stein