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title: "House Oversight: Estate Documents (Nov 12) (HOUSE_OVERSIGHT_014594)"
source: "House Oversight: Estate Documents (Nov 12)"
sourceUrl: "https://www.justice.gov/epstein"
date: "2026-01-01"
category: "House Oversight"
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---
incorporates this view, as we are neutral on the
euro, yen and pound versus the US dollar, but
remain bearish on the Chinese renminbi.
We discuss our view on the broader US dollar,
as well as each of these currencies, next.
US Dollar
Following three consecutive years of dollar
outperformance, it would be reasonable to assume
the up-cycle is nearing an end. After all, dollar
valuation is now close to its historic average level
relative to the currencies of US trade partners, after
adjusting for inflation. Moreover, the length of this
dollar bull market is approaching that of the two
prior episodes shown in Exhibit 71 and shares a
similar underlying driver-tighter monetary policy
in the US relative to its global peer group.
But while we expect the pace of US dollar
appreciation to slow, there are many reasons
to believe the greenback's outperformance can
continue this year. Dollar valuation remains
below the peaks reached in the 1985 and 2002
bull cycles, suggesting it is not yet prohibitively
expensive. The dollar should also benefit from
solid US macroeconomic fundamentals relative to
other developed economies. President-elect Trump
ran on a platform that includes fiscal expansion
and corporate tax reform. Although his economic
team's spending plan is still forthcoming, the
package could represent an economic tailwind that
may justify tighter US monetary conditions at a
time when foreign central banks have committed
to easier policy. In turn, relatively higher US yields
may entice global investors to favor US dollar
assets over lower-yielding foreign-denominated
alternatives.
Furthermore, some elements of the new
administration's desired corporate tax reform
could present material upside risk to the US dollar.
For example, the destination-based tax system
supported by several House Republicans disallows
deductions for any imported good or service—
Exhibit 71: US Dollar Real Effective Exchange Rate
Dollar valuations are near their long-term average but below
levels reached in past bull cycles.
Z-Score
2 -
0
-2
1973
1978
6.3 Years
1983
1988
1993
6.8 Years
1998
2003
2008
5.4 Years
2013
Data through November 30, 2016.
Note: Z-score is calculated on data since 1973 and represents the number of standard deviations
from the mean. Shaded areas highlight periods of dollar strength.
Source: Investment Strategy Group, Datastream.
Dollar gains are likely to be more
modest and reflected in a narrower
set of currencies as the dollar bull
market enters its fifth year.
effectively supporting US goods by making them
more competitive. Economic theory suggests that
free-floating currencies such as the US dollar
would need to adjust higher by the amount of
the tax to create equilibrium with similar goods
sourced across foreign borders. Taken at face
value, this implies a 20% destination tax would
require a simultaneous-and potentially very
disruptive—20% increase in the US dollar. A tax
holiday for cash held abroad could be similarly
dollar positive, in spirit if not in magnitude. While
it is true that a majority of the $2.6 trillion of US
corporate earnings trapped overseas are already
held in US dollar assets, the greenback would still
enjoy a tailwind if corporates elected to repatriate
some portion of the foreign currency balance.
That said, the risks to the US dollar are not
exclusively to the upside, as much of the good
news is embedded in current prices (see Exhibit
72). Consider that the bulk of last year's dollar
advance occurred in the two weeks following the
US presidential election in November, as
the market quickly discounted a portion
of potential policy changes. Moreover,
Federal Reserve rate hike expectations
for 2017 have increased following
stronger US activity data during the
second half of 2016. Lastly, we expect
the BOJ and ECB to maintain their
highly accommodative policies again
this year. With these tailwinds already
Outlook Investment Strategy Group
61
HOUSE_OVERSIGHT_014594
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