Implications of the Dollar rally
While the causes of the rally vary two underlying themes have emerged. First, one must consider that the dollar began its climb years ago as interest rate differentials between US treasuries and international bonds began to widen. This process is now accelerating post-election. 10 year US treasuries yield 2.31 percent up 60 basis points since the election. German 10 year Governments in contrast are yielding 0.20 percent while10 year Japanese Governments are yielding only 0.03 percent. Second, the US business cycle has diverged from its trading partners. Expectations of US GDP are 2 percent for 2017 but can accelerate north of 3 percent on the back of a predicted United States fiscal stimulus. Fiscal stimulus in Japan has so far failed to improve economic output, while in the European Union governments already burdened by high debt are attempting to stimulate their economies though expansionary monetary policy with limited success .
It is our opinion that the US dollar will continue to rise in 2017, reaching parity with the Euro while increasing in value against the Chinese Yuan, Japanese Yen and Canadian Dollar. The US dollar has risen dramatically against the British Pound and should maintain these gains.
The strong dollar will attract foreign investment to the United States as global companies seek to align themselves with American partners. The combination of a growing economy and strong currency will place American companies in an advantageous position 2017, enhancing valuation metrics and benefiting shareholders.
In addition, US companies considering acquisitions will take advantage of the strong dollar. An appetite for technology assets in Europe and the UK will lead US strategics and financials to accelerate global partnerships. We see increased interest from US and Chinese technology providers as they compete across a variety of platforms. In particular firms that provide digital marketing, social media and collaborative media (which joins television, you tube and social) are prime acquisition targets as firms integrate technology and culture in order to provide an enhanced experience for the consumer.
November 22, 2016