NEW YORK–An epic rally in the dollar has investors wondering how much further it can run, though many are biding their time before turning bearish on the US currency.
The dollar is up about 13 percent this year to a two-decade high against a basket of peers and is on pace for its best year since 1997, lifted by a hawkish Federal Reserve and investors seeking a haven from global economic uncertainty.
Its steady climb has rippled through markets, helping push the euro to its lowest level in more than two decades and weighing on the earnings of US corporations such as Microsoft and BlackRock.
The extent of the dollar’s strength has taken markets by surprise.
A model used by BoFA Global Research comparing macroeconomic fundamentals in different economies, for example, last month showed the dollar was overvalued against the currency of every G10 country. Moreover, history shows that while the greenback tends to strengthen before a Fed hiking cycle, it begins to fall soon after, a pattern it has so far deviated from.
Still, the dollar’s momentum has made investors hesitant to stand in its way.
“Almost any currency looks attractive compared to the dollar on a longer-term basis, but investors have to ask themselves … what happens if you put on a position and the dollar keeps on strengthening?” said Brian Rose, senior economist at UBS Global Wealth Management.
Though recession worries have flared in the US as the Fed tightens monetary policy, the outlook for many other economies appears even gloomier, increasing the dollar’s allure. A potential energy crunch in the euro zone, for example, has investors doubting the European Central Bank can raise rates far without hurting growth.
“One cannot have a weak USD (dollar) without a strong EUR (euro), and right now, the latter is in the midst of a structural shift that will be incredibly painful,” analysts at TD Securities wrote. They believe the euro could fall as low as $0.85, after breaching $1.00 this week for the first time in 20 years.
