Interview
Why the US Dollar Could Continue to Strengthen
- The U.S. dollar is projected to remain strong through 2026, with potential for appreciation driven by real rate differentials and a possible Federal Reserve shift toward a more hawkish stance on price stability.
- Market pricing currently reflects six to seven basis points for a July rate hike and more than a full hike by year-end, though these probabilities may underestimate the likelihood of a hawkish policy shift.
- Significant dollar appreciation requires either a hawkish Federal Reserve response or a relatively dovish global growth outlook, as real rate differentials support value even if rates are held.
- Specific currency valuations suggest the dollar is undervalued and should settle at levels 2% to 4% higher against certain currencies based on current valuations and interest rate conditions.
- Carry trade opportunities are anticipated into the summer of 2026, with specific preference for long positions against G10 francs to capture annualized returns of 3% to 4%.
- Risks favoring a stronger dollar over the next three to six months include a re-escalation of U.S.-Iran conflict driving energy prices up, global volatility, and market expectations of multiple rate hikes or a full hiking cycle before next year.
- The Japanese yen faces continued weakening pressure absent more aggressive fiscal and monetary policies from Japan, though a potential shift in Japanese pension investment policy toward domestic assets could significantly alter exchange rates.
- Emerging market currencies, particularly in Brazil and Egypt, maintain a bullish outlook, while a global shift away from the dollar as the primary reserve currency is not expected to occur in the near term.
- Overall, the dollar is expected to maintain its position and settle at higher levels despite world volatility, with the distribution of outcomes skewed toward the dollar appreciating rather than depreciating.