The dollar will keep rising as investors deal with recession fears and won't peak until interest rates stabilize globally, JPMorgan says

• The US dollar won't peak until global recession fears subside, according to JPMorgan.
• That doesn't appear likely in the near-term, as Europe and China face major growth slumps.

The US dollar will keep strengthening as investors grapple with recession fears – and it's unlikely to peak until interest rates stabilize globally, according to JPMorgan.

The dollar has soared this year, strengthening against rival currencies as the Federal Reserve hikes rate to tame inflation. The US Dollar Index, which measures the greenback against a basket of currencies, has risen 14% this year to $109.70, just below its 20-year high of $109.81.

But it spells trouble for stocks, as a strong dollar is a headwind to corporate earning. Firms doing business overseas could see a decline in foreign sales when the price of US goods becomes too expensive, according to JPMorgan strategist Gabriela Santos, who estimates that the dollar's spike could take off $.60 from the S&P 500's operating earnings per share this year.

"This strength presents a mixed backdrop for the U.S. economy by dampening inflation, but dragging on real economic growth due to a widening trade deficit," Santos said in a note on Thursday. "For U.S. investors, the currency strength exacerbates concerns about S&P 500 earnings growth and acts as a drag on international equity returns."

But the dollar likely won't peak until the gap is closed between the Fed's policy rate and other central banks, she said.

The Fed's aggressive rate hikes have raised the difference in interest rates between US treasuries and foreign market bonds by 51 basis points over the past six months, according to Santos. The Fed is leading other central banks in its policy rate, clocking in at 2.33%, while the European Central Bank hiked its policy rate to 1.25% earlier this month.

Global recession fears have also continued to push the greenback higher – meaning the economic outlook needs to improve as well for the dollar to see some relief.

"Global growth fears seem to have taken the front seat … In the short-term, the dollar peak may be delayed as investors still wrestle with global recession fears, keeping volatility elevated across assets and dragging on international equity returns," Santos said.

Those fears aren't likely to go away in the near-term, she warned. Europe is scrambling to prepare for an energy crisis this winter, which threatens to send its economy into a recession, and China's slow emergence from lockdown is still fueling concerns for a slump in global economic growth.