Ken Orchard, co-manager of T. Rowe Price's International Bond Strategy fund, doesn't think the resurgence of the dollar will last. Disappointing U.S. inflation figures, positive election outcomes in France and Germany, Bank of Canada rate hikes and strong GDP growth in other parts of the world pushed the dollar back up but aren't built to last in building a longer-term dollar trend.
Inflation looks like it may pick up, the Federal Reserve could hike rates again in December, while the European Central Bank is sounding more dovish. Orchard said he expects the greenback to rise over the next three to six months. "Our view is that this has become overextended. The dollar has bottomed for now," he said.
That dollar weakness is good for U.S. stocks, too. Market-beating hedge fund manager Daniel Loeb of Third Point wrote in a letter to investors last Friday that he is very bullish on the U.S., and it's still his largest stock market weighting, because economic growth is improving due to the weak U.S. dollar, among other factors. But he has also increased exposure to Europe this year and cited "synchronized global growth" as the reason for his overall bullish stock views.
Investors have started moving more money to international stock markets as a result of the U.S. stock market being the priciest globally. Orchard thinks that's a safe bet, as far as the dollar effect. Over the next two to three years, the dollar trend will continue to be a tailwind for that migration of market money. The dollar will likely continue to fall, largely due to economic cycles in other countries. The U.S. economy is moving into a later stage, while Europe and other nations are moving more into the middle cycle. "At some point the Fed will stop hiking rates, while other central banks will start hiking them," he said. "That should drive a decline in the dollar."
From mid-2011 to late 2016, the U.S. dollar strengthened close to 30 percent against developed and emerging currencies, but Orchard is not alone in thinking that the recent reversal will be a blip and the dollar will continue to be weak, boosting the attractiveness of international stocks.