The Streak Illusion
Like the hot-hand fallacy in basketball, recent market trends rarely predict what’s next. Last year’s weak US dollar was no exception.
The NBA playoffs are in full swing, and it’s tempting to believe that feeding the ball to the player who’s “hot” is the smart move. But research on the hot-hand fallacy shows that even long shooting streaks don’t make the next shot more likely to go in.
The same logic applies to markets. After the US dollar fell last year, many investors expected more weakness in 2026. Instead, the dollar is up slightly so far this year. That shouldn’t be surprising.
Historically, whether the dollar has a negative or positive year, the odds of a stronger or weaker dollar in the subsequent year are about the same as a coin flip. Short-term streaks—on the court or in currencies—don’t tell you much about what comes next.
EXHIBIT 1
US Dollar vs. Select Currencies
Prior year returns vs. subsequent year returns, 1990–2025
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