Most anticipate a modest and relatively slow tightening by the Federal Reserve primarily because a consensus believes tightening efforts will lead to a much stronger U.S. dollar. However, we suspect a surprising decline in the U.S. dollar will exacerbate inflation anxieties and accelerate the pace of Fed tightening from what is currently anticipated.

Looking into 2017, we recommend investors position portfolios as a dollar contrarian. Crowded consensus trades are not often fruitful and frequently prove risky. If the consensus is surprised by a falling dollar, many portfolios will need to be adjusted. Surprising dollar weakness will benefit commodity prices and penalize high-quality bond investors. It would also favour international stocks, particularly emerging market equities.

Moreover, it would likely extend the leadership of small and mid-cap stocks evident so far this year. Finally, a weaker dollar would probably focus investors on the materials, industrials, technology and financials sectors within the U.S. stock market

Eoin Treacy's view

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The Dollar Index has been largely rangebound since early 2015 and pulled back this week from the region of the upper side of the congestion area. With such a clear downward dynamic it is now for the bulls to prove their case by posting at least an equally impressive upward dynamic to retake the initiative as the short-term overbought condition is quickly unwound.

The US presidential election, now only four full days away is a major contributor to volatility, not least as polls are so tight and there is an increasing possibility of 2000-style recounts in a number of battleground states. It is hard to imagine that a Trump victory would be positive for the Dollar in the short term.

This has been a bullish week for precious metals and today’s impressive rebound from intraday lows suggests investors and traders are no longer willing to wait for fresh lows before initiating positions. Silver in characteristic volatile fashion had a wide intraday swing relative to recent trading and closed well off its low.