Why next year’s dollar move could be historic

Published Tue, Dec 22 20153:51 PM EST

Patti Domm @in/patti-domm-9224884/@pattidomm

While "long dollar" is viewed as the most crowded of trades, the currency is widely expected to continue its rise into next year and beyond. Propelled by Fed rate hiking versus the heavy stimulus being applied elsewhere in the world, the U.S. dollar index should once more have a strong year in 2016, on top of its 9 percent rise this year. But the interesting thing about the dollar's move is that it could be the only one of its type, even when looking all the way back to the early 1970s. That was when the fixed exchange rate system put in place at the Bretton Woods international monetary conference in 1944 was replaced by a floating rates system. What's different is the potential duration of the dollar's leadership ... Alan Ruskin, head of G-10 currency strategy at Deutsche Bank, said if the U.S. dollar finishes higher against all G-10 currencies this year, it would be the best performing in a clean sweep for two years in a row. That would be the first time since 2000 and 2001 that it has accomplished that feat. There is only one currency that is higher against the dollar as of now, and that's the Swiss franc, up less than 1 percent year to date. In 2014, the dollar was higher against all the G-10 currencies. Read More Santoli: 'Bridesmaid strategy' beats the market If the dollar bests the "Swissie" by the end of the month, it would head into 2016 on track for a potential third year of gains against all the rest, and that would be the first time ever. "It would be impressive," Ruskin said. He pointed to a period of similar dollar strength between 1981 and 1984 when the dollar was up pretty much against all other G-10 currencies. In 1981, the Canadian dollar and the U.S. dollar were the strongest and in 1983, it was the dollar and yen at the top. Ruskin expects the dollar to continue rising broadly for the next two years, with a gain of 10 percent. Next year he expects the euro to fall to parity and ultimately reach 0.95. "It could be like 1981 to 1984. There were a few times a currency was interceding and still broader dollar strengthening," he said. Ruskin forecast that the dollar should also continue higher against the yen, hitting the 128 level in 2016. Read More Here are the best analysts on Wall Street today He said if the Fed does raise rates repeatedly in 2016 as it has forecast, that would clearly boost the dollar against the other G-10 currencies. Economists are expecting two to three 2016 rate hikes, compared to the four Fed officials are forecasting. But if there is an unforeseen risk-off event, the dollar would still rise but maybe not against all of the G-10. "If it's a risk-off event, it's probably going to be concentrated in these riskier currencies," he said. The major currencies like the euro and the Swiss franc could rise in that scenario. "It will either be the Fed will be tightening if the global economy is behaving. If it's misbehaving, it's going to be positive for the dollar too," Ruskin said.

Getty Images

While "long dollar" is viewed as the most crowded of trades, the currency is widely expected to continue its rise into next year and beyond.

Propelled by Fed rate hiking versus the heavy stimulus being applied elsewhere in the world, the U.S. dollar index should once more have a strong year in 2016, on top of its 9 percent rise this year.

But the interesting thing about the dollar's move is that it could be the only one of its type, even when looking all the way back to the early 1970s. That was when the fixed exchange rate system put in place at the Bretton Woods international monetary conference in 1944 was replaced by a floating rates system.

What's different is the potential duration of the dollar's leadership ...