Extract from our "Reaffirming Our Constructive Outlook for the Dollar" research paper, published on the 28th March, 2014. Register for a free trial* to access the full paper.
We believe that the dollar weakness seen in the last two months will likely prove to be temporary, and expect the dollar to appreciate this year, against a broad range of currencies. In this note, we take a step back to critically re-examine our thesis on the dollar by (i) updating our currency valuation calculations and (ii) thinking through the likely scenarios for bonds and equities for 2014. We conclude that the dollar still looks cheap on our measures, and for US bonds and equities, we will likely see much lower real excess returns on the SnP this year, compared to the previous five years. A repeat of what happened in 1979 (when equities generated a modest return while bonds experienced a small loss) or 2000 (when equities sold off sharply while bonds rallied) are two scenarios we see as more probable than alternative scenarios, e.g., such as that both bonds and equities rally simultaneously or sell-off simultaneously. In both of the ‘1979’ or ‘2000’ scenarios, we think the dollar should perform well, for different reasons.
The full report contains the following sections:
- Our positive outlook for the dollar
- How will equities and bonds perform?
- How should the dollar perform in the various scenarios?
- How could the disappointing performance of the dollar so far this year be explained?
- Bottom line
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