Hopes that the Federal Reserve may be less aggressive in hiking borrowing costs than previously feared have rippled swiftly across markets in the past week. Stocks have rallied as bond yields have dropped. And it has brought the dollar’s rampage to a juddering halt. The dollar index
which hit a 20-year high above 108.5 in July, is now near 105.5.
“Risks to dollar dominance may be rising,” says Evercore, and investors should position for the benefit a softer buck may bring to certain parts of the stock market. There are two factors that will weigh on the greenback, one short term and the other long term, reckons the investment bank. More immediately, softening inflation expectations could allow the Fed to slow the pace of monetary tightening, or even pause. Thus the interest-rate differentials with other major economies that have been supporting the U.S. currency will moderate. This should also feed into equities more broadly. “A pause — or the end of the hiking cycle, only known in hindsight (which investors may have overzealously discounted this past week) — has tended to see stocks rally, albeit with elevated volatility,” says Evercore. Looking further ahead, Evercore warns that U.S. government debt service costs are expected to rise to record levels, affected by quantitative tightening, “and the secular move to higher interest rates and the ever-ballooning debt, prospectively pressuring the ‘World’s Reserve Currency.’” So, how best to benefit in stocks? Choose those with the highest international revenue exposures and for whom …