The recent surge in the U.S. dollar could soon lead to some kind of economic or financial crisis, according to Michael Wilson, chief U.S. equity strategist at Morgan Stanley.
“If there was ever a time to be on the lookout for something to break, this would be it.” Earlier in 2022, Wilson had accurately predicted that U.S. stocks would decline this year.
The U.S. Dollar Index has jumped by 19 percent this year, while stocks have fallen by 23 percent. A rise in the value of the U.S. dollar negatively affects the international sales of American companies.
A 1 percent change in the U.S. Dollar Index is calculated to have a negative 0.5 percent impact on company profits, according to Morgan Stanley. Wilson believes stronger currency and factors like high input costs will affect S&P 500 Index fourth-quarter earnings by around 10 percent.
Dollar Sales, Future MovesIn a Sept. 27 tweet, Cathie Wood, CEO and founder of Ark Investment Management, noted that Japan and China have sold U.S. dollars to protect their currencies against the American currency. The two Asian nations have begun putting out more dollars into the financial system.
“Japan’s and China’s dollar sales could be the first sign that ‘monetary easing’ is on the way. The dollar’s parabolic move has been devastating to the rest of the world and should come back to bite U.S. competitiveness, jobs, and economic activity, forcing the Fed to pivot,” Wood wrote.
The dollar’s rise is being supported by investor expectations that the Federal Reserve will continue raising interest rates. The Fed has indicated its commitment to fight against elevated inflation even at the risk of causing economic pain.
According to a Reuters poll of 70 foreign exchange strategists conducted earlier this month, the dollar is expected to remain strong for the remainder of 2022 due to rising interest rates and a strong economy. The currency is, however, expected to give up some of its gains in 2023.