It’s commonly believed that the US dollar gains strength when the Federal Reserve starts raising interest rates, but Ugo Lancioni portfolio manager, Global Fixed Income and Currency at Neuberger Berman, suggests otherwise.
“The dollar has been on a tear recently, appreciating against a basket of major currencies by about 10% since the beginning of 2015 and about 25% over the past 12 months (DXY dollar index). Considering that the long-term average volatility of the dollar index is about 7%, annualized, this is a major move.
“By most accounts, the surge is tied to both strong economic growth in the US and diverging monetary policies. The Fed is moving toward tightening while central banks in other more growth-challenged markets are still easing. In fact, the start of current dollar rally coincided with the end of the Fed’s bond purchase program and accelerated with increased speculation on the timing of its first rate hike—now generally anticipated for the coming summer.
Dollar Declines—After Fed Starts Raising Rates
“What will happen when the Fed finally starts to raise interest rates? For insights, we looked at the four major tightening cycles that have occurred over the past 30 years, from the end of the Volcker era to Alan Greenspan’s last rate increases in 2004-06. We examined the behavior of the dollar both before and after the Fed started increasing rates and found that, rather than appreciating, the dollar generally declined after the beginning of rate tightening. In essence, the bulk of the appreciation was in anticipation of rate increases.