Historically, the answer has been no. The dollar’s value tends to decline after the Fed starts to raise rates, for just that reason: the policy divergence tends to revert to normal. This time looks like it may well be the same. Fed tightening was always going to be gradual, and it now seems likely to be even more so. Meanwhile, the ability of foreign central banks to provide additional stimulus is running out.

In other words, the spike after the crisis tends to subside, as we are seeing right now. We may be reverting back to the lower values that have been typical over the past 30 years.

How to take advantage of a potentially weakening dollar?

I have a few thoughts:

A weakening dollar would reverse the damage done to U.S. companies’ foreign earnings, which could have a major effect. Companies that do most of their business outside the U.S. could benefit substantially.

A weakening dollar would also help push commodity prices, including oil, back up in dollar terms. This could be another tailwind for the oil price, on top of the factors I mentioned yesterday.

In both cases, the U.S. is likely to become more competitive, giving a boost to the manufacturing sector, which is more export-oriented than the service sector.

This is, in many respects, a mean reversion argument. The key to using mean reversion successfully is to understand the logic driving the reversion, rather than just assuming it has to happen. Here, that logic is clear and represents a potential opportunity to buy into some beaten-down sectors of the market.

Brad McMillan is the chief investment officer at Commonwealth Financial Network, the nation’s largest privately held independent broker/dealer-RIA. He is the primary spokesperson for Commonwealth’s investment divisions. This post originally appeared on The Independent Market Observer, a daily blog authored by Brad McMillan.


 

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