(Harvest) After another soft start to the year, the U.S. dollar has been strengthening in recent months. Increasing confidence in a less tentative Federal Reserve (Fed), coupled with higher interest rates, has pushed the dollar up roughly 2.5% from its February low (source: Bloomberg). To the extent the Fed is hiking more aggressively in an environment in which the Bank of Japan (BOF) and, potentially, the European Central Bank (ECB) remain in an easing mode, the dollar is likely to continue to find support.
A cheaper euro or yen provides a lift to Europe and Japan, which in general are more export driven than the more domestically oriented U.S. economy. The challenge is that what the dollar gives, it also takes away. Although European or Japanese companies become more competitive, for dollar-based investors the returns to these markets are reduced to the extent that the dollar rises against the euro and the yen.
