Dollar Could Weaken Even As Fed Embarks on Rate Hiking Cycle

The rationale for predictions of continuing strength in the dollar are well-known but may be wrong, writes Ben Levisohn for Barron’s. Fundstrat strategist Thomas Lee looked at the last 11 tightening cycles (when the Fed began raising rates) and found that five involved “divergence” from European central banks (meaning that they were easing), which lasted a median of 17 months. During such times, according to Lee, the dollar has typically weakened a median 6.6% during the six months after such a Fed interest rate rise.  A weaker dollar could significantly benefit U.S. corporations that have suffered recently. Lee “estimates that the dollar’s rise this year has subtracted $93 billion from the profits of S&P 500 companies, or $10 per S&P share.” He suggests U.S. corporate profits would have grown by 8% in the absence of the strong dollar’s impact.