Dollar may not rise after rates hike, as history shows conventional wisdom may be mistaken

The possibility of a Fed interest-rate hike next month is at 74%, based on futures prices, shows CME Group’s FedWatch. That consensus has been buoyed by the recent hawkish Fed talk, with the U.S. dollar a big beneficiary.

However, Ryan Detrick, a market strategist for Kimble Charting Solutions, noted recently that conventional wisdom may not always be true. Economics, school, television have been telling us that higher U.S. interest rates will be a boon for the dollar, but history may not agree.

Over the past 20 years, in three higher-interest-rate cycles, the dollar index fell during two of those periods:

Reality or academics? Investors need to be careful before deciding how to manage their money. Here is a Bloomberg chart of how the dollar traded vs the Deutsche mark back in 1994:

That time, however, Germany’s rates were coming down from the highs of the post-unification boom and its bond yields stayed higher than those of the U.S. even with the policy split.

Yet, German and U.S. yields finally converged, as the Fed and Bundesbank kept on walking their separate paths after they diverged in 1994. The rates on U.S. 10-year Treasuries added more than 200 basis points - what was known as an annus horribilis for bond traders. By the mid-1995, the dollar was climbing.