The US dollar may remain under pressure in the near term, but we doubt the strong-dollar cycle is over. Dollar weakness at this stage of the economic/market cycle is typical and may simply be a prelude to renewed strength.

The recent sell-off in the dollar is clearly linked to the rapid re-pricing of the outlook for US Federal Reserve rate hikes. At the end of December, the market was expecting about 100 bps worth of tightening in 2016; by mid-February, none. Uncertainty over the outlook for the US economy throws cold water on the thesis that Fed rate hikes will drive the dollar higher, and the strong moves in the euro and Japanese yen over the past couple of weeks indicate the unwinding of crowded long-dollar positions.

However, it is too soon to expect a period of prolonged dollar weakness for at least two reasons: (1) the US dollar typically rallies during periods of market stress and (2) periods of US dollar weakness typically occur when the Fed is easing monetary policy while other central banks are tightening.

Since the era of floating exchange rates began in July 1971, there have been eight equity “bear markets” (defined as an approximate peak-to-trough 20% decline in the MSCI World Index in local currency terms), excluding the current sell-off. The typical pattern, although there are notable exceptions, is for the US dollar to weaken in the early stages of the market sell-off but then rally as the bear market intensifies, often peaking mid-way through or at the end. This is especially true if the bear market coincides with a US recession; while the US dollar has rallied during five out of eight bear markets, it has strengthened amid five of the six official US recessions since 1971.

The exceptions are the short-lived market panics of 1987 and 1998, and the 1990–91 recession and bear market. What these periods have in common is a Fed aggressively easing rates while other central banks remain on hold. This was especially the case in the 1990–91 recession, when US interest rate differentials turned deeply negative.

This is why the US dollar may have more to run. The Fed may very well remain on hold for the rest of the year, or even cut rates, but is unlikely to follow the European Central Bank (ECB) and Bank of Japan (BOJ) into resumed quantitative easing or negative rates. With the ECB hinting it might expand its QE program in March and the BOJ going down the rabbit hole of negative rates, US interest rate differentials will remain positive and provide support for the dollar. A serious US recession could force the Fed into renewed QE and negative rates, but history implies the US dollar will rally strongly before the Fed acts. Furthermore, intensifying stress in emerging markets and commodity-related borrowers could trigger a global liquidity squeeze which historically has driven the US dollar higher.

Alternatively, the US dollar could continue to weaken if the US economy stalls but growth in Europe, Japan, and elsewhere accelerates—resulting in global central banks tightening before and/or more aggressively than the Fed, turning US interest rate differentials negative.

One can imagine a number of scenarios unfolding over the next couple of years, but a plausible one is that Fed rate hikes go on hold and the US economy avoids a recession. Uncertainty over Fed policy weighs on the US dollar in the near term but a recovering economy leads to renewed Fed tightening in 2017, sending the US dollar higher, potentially setting up a recession in 2018 that sets in motion the next weak-dollar cycle. Given that the current strong-dollar cycle began in July 2011, such an outcome would be in line with the previous two strong-dollar cycles, both of which lasted roughly seven years.

While history doesn’t always repeat, it does tend to rhyme. Given the uncertainties facing the global outlook and the fact that the US dollar tends to rally amid periods of market stress (especially if it has a positive interest rate differential), it is too soon to assume the strong-dollar cycle is over.

Aaron Costello is a Managing Director on Cambridge Associates’ Global Investment Research team.

For more on US dollar cycles, please see our October 2015 Chart Book, What’s Next for the US Dollar?