Concerns have been expressed that the strength of the dollar is reason for the Fed to postpone ‘normalizing’ its overly accommodative monetary policy stance. Arguments have been that the dollar is doing the Fed’s work and choking off growth in manufacturing and export industries and therefore the Fed need not raise rates lest they jeopardize fragile growth prospects.

In reviewing the dollar index trade following subsequent tightening cycle beginnings back to the mid-‘80’s, we note that following each of those lift off dates, the dollar index fell over the next months, whether it was peaking coming into the Fed’s action or already sliding lower. On average following the last four Fed policy firming initiations, the dollar index has fallen 14% over the next 9 months.

Using this as a rough guide, we might look for a pull-back in the dollar index from 100 to 86 by Q1 2016. The rational here is obviously that the dollar has already strengthened both on the back of better economic prospects and anticipation of Fed raising policy rates. The latter having been priced may prompt long dollar position holders to take profits upon initiation of Fed accommodation removal. As such, the Fed need not fear prompting dollar strength on "lift-off" and instead should proceed in proving the market correct in their assessment of monetary policy intent.