Dollar looks poised to weather Fed cuts

Bloomberg

Investors are bracing for the dollar to keep appreciating through at least early 2020 even though the Federal Reserve looks poised to cut rates and the risk of a US recession remains elevated.
The dollar has already surprised investors by holding steady even after Fed reductions in July and September. Now, with the world’s growth outlook decidedly downbeat, Columbia Threadneedle Investments is positioning for the greenback to strengthen against the euro by more
than many forecasters are predicting over the next three to six months.
A trio of catalysts should support the dollar through the first quarter, according to Columbia Threadneedle’s Ed Al-Hussainy: US rates exceed most other developed nations, domestic inflation is in a “better place” than Europe’s, and global growth expectations are being downgraded.
The senior analyst says the $469 billion asset manager is prepared for the greenback to strengthen towards parity — a level it hasn’t traded at since 2002 — against the euro, from about $1.1090 currently, despite the common currency rallying 1.7% against it in October.
Economic theory suggests the dollar should move in the same direction as interest rates, but reality shows that’s not always the case.
At the moment, a mix of positive and negative US data, along with occasional progress on trade and Brexit, are complicating Fed policy makers’ assessment of the economy as their two-day meeting in Washington gets underway. After the expected reduction, it’s unclear whether the central bank will cut rates again soon.
“The theory that the dollar should be weakening, along with the Fed lowering rates, depends on whether the rest of the world is in a steady state, with no radical changes in policy being undertaken,” said Scott Kimball, a Miami-based bond portfolio manager whose team oversees $12 billion for BMO Global Asset Management.