The dollar is on track for its strongest two-week performance in six months, a reversal that analysts believe will sustain the currency's upward trend for the rest of the year. This shift is attributed to several factors, including the Federal Reserve's hawkish stance on interest rates, the ongoing growth in the artificial intelligence sector, and heightened global geopolitical tensions. Amundi's head of global FX, Andreas Koenig, noted that the U.S. remains a leader in AI growth and capital expenditure, which, combined with favorable rate differentials, supports the dollar.
The Bloomberg Dollar Spot Index has climbed approximately 2% over the past two weeks, reaching its highest point since July. Options pricing suggests further gains are likely. This surge coincides with strong U.S. economic data that has prompted expectations of additional Fed rate hikes, pushing Treasury yields to multi-year highs. Simultaneously, the tech-heavy Nasdaq 100 hit a record, and oil prices resumed their ascent. Bank of America strategist Alex Cohen anticipates that dollar strength will persist into the year-end.
This recent rally marks a significant departure from previous narratives that predicted dollar weakening due to global tariffs and soaring U.S. public debt, which approached $40 trillion. Morgan Stanley, which had long predicted a weaker dollar, has now turned bullish, with FX strategists led by David Adams admitting, "We were wrong." The dollar index has gained 1.6% in September after declines in July and August, as Treasury yields across maturities approached or surpassed 5%. This period's seasonal trends have also contributed, with the final full week of September historically being the dollar's strongest over the last decade.
Despite the dollar's strength, some strategists express caution. HSBC's senior FX strategist Daragh Maher foresees only a "modest dollar appreciation," citing the "ambiguous relationship" between Treasury yields and the dollar due to high U.S. fiscal deficits. Speculative traders were caught off guard by the Fed's hawkish shift, having reduced their positive dollar bets prior to the policy meeting. Nathan Thooft, a senior portfolio manager at Manulife Investment Management, believes that aggressive market pricing for future rate hikes sets a high bar for the Fed, and any signs of cooling inflation, labor market, or growth data could limit further dollar upside.
