Don't fear the dollar's "orderly rise" There are a lot of crowded trades in world markets today, but the most crowded of all is probably a bet on the dollar. The sheer breadth of the consensus is the best reason to be worried about a rising greenback; we do not want all of the world's money flowing in the same direction. But a more or less orderly rise in the dollar could be good news for the global economy and for investors. It is not hard to see why the dollar has risen 9 per cent on a trade weighted basis since early July 2014. The US is growing faster than most of the rest of the developed world, and its central bank looks like it might finally succeed in raising interest rates next year at a time when the Bank of Japan and the European Central Bank are still heading in the opposite direction. If relative growth and interest rate differentials were not enough to support the greenback, there is America's incredible shrinking current account deficit. Barely a third of the energy that the US consumed last year was imported, down from 60 per cent in 2005. You may say all of these supportive factors were already priced in. None of it is exactly new news. But once major currency trends become established, they tend to last a while, and the recent move is pretty small compared with the 20-30 per cent swings in the value of the dollar we have seen of the past. If it does not rise of its own accord, we also know the ECB and the BoJ will do their best to push it in that direction. Their efforts to reflate their economies depend increasingly on importing inflation from overseas. For US investors, a strengthening US dollar is likely to have some adverse impacts on equity returns. In 2013 the S&P 500 companies were holding over $1.9tn in overseas investments, the value of which is likely to erode rapidly as the US dollar strengthens. But only around 30 per cent of S&P 500 revenues came from overseas in 2013, and in the past few weeks the more domestically oriented stocks have helped take the US market back to record highs. The prospect of a weaker euro should be especially positive for European corporate profits, particularly when coupled with falling oil prices. Other things equal, we reckon that a 10 per cent drop in the euro's trade weighted index will tend to boost corporate earnings by around 8 per cent, on average. After more than three years of flat or falling European corporate earnings, the latest figures show respectable growth, albeit from a low base. Emerging market (EM) equity prices have historically had a very strong negative correlation with the trade weighted dollar. This is because a strong dollar has tended to go along with weaker commodity prices and capital outflows from EM. There is also a currency translation effect, which lowers the dollar value of EM earnings. But energy and basic materials now represent a smaller proportion of assets in the MSCI Emerging Market index than in some previous periods of dollar strength. Countries closely linked to the US economy could benefit, notably Mexico. So investors do not necessarily need to fear a stronger dollar. But in currency markets - as in life - it is not just what you do that matters, it is the way that you do it. A stronger dollar is a win-win for the global economy if it prolongs the US recovery and helps the rest of the world revive demand. It is dangerous if it reflects a more dramatic divergence in the economic fortunes of the world's most important economies - and the dollar and its currency become the only game in town. In such an environment, EM economies are likely to see major capital outflows, and the US Federal Reserve will struggle to push up long-term interest rates even after short-term policy rates have been increased. The dollar could soar and capital inflows could put excessive upward pressure on a US equity market that already looks decently priced, if not yet expensive. In such a scenario, the world would be forcing the US to resume its role as the spender of last resort - at a time when America might otherwise be moving to a more sustainable balance of payments position and a more normal stance of monetary policy. That is not the recovery the world wants. But if Europe and Japan cannot generate their own growth and inflation over the next year or two, it can certainly not be ruled out. The last time the US dollar rose sharply and the oil price collapsed it was the start of the great recession. The prospect of unbalanced global growth over the next year or so is a lot more attractive than no growth at all. Stephanie Flanders is chief market strategist for Europe at JPMorgan Asset Management