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.