The US dollar is up over 6% this year, almost entirely due to a post-election surge. While many developed nations experience stagnant economic growth or contraction, the US economy continues to perform well. This strength is further supported by the expectation that the Fed will slow or halt rate cuts after this Wednesday’s FOMC meeting. Wall Street anticipates that the dollar will peak and decline in 2025 despite its current strength and favorable economic conditions.
Several sell-side strategists, including those from Morgan Stanley and JPMorgan Chase, predict the world’s reserve currency will peak as early as mid-next year before declining. Societe Generale forecasts the ICE US Dollar Index will fall 6% by the end of next year. This potential decline raises questions about its impact on domestic and global stock allocations. Recent research from Crescat suggests a correlation between the dollar index and the relative returns of the S&P 500. The research indicates that a strong dollar often correlates with weaker returns for the S&P 500. However, this opinion could change with an economic recession. Adding exposure to non-U.S. stocks might be beneficial if the dollar weakens alongside economic weakness. The market is approaching the end of the December portfolio rebalancing and distribution period. While the market might experience volatility ahead of the Fed meeting on Wednesday, it is expected to rally into year-end as corporations complete buybacks and managers rebalance their portfolios. A noteworthy concern for next year is the very low volatility index readings, which often signal potential short-term corrections and consolidations. The S&P 500 is trading well below its 50-day moving average and is considered moderately oversold on a relative strength basis
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