The dollar is on track for one of its strongest months in a year as Wall Street banks adjust their outlook on the US currency. Strategists at major financial institutions now see renewed strength after Federal Reserve Chairman Kevin Warsh signaled a commitment to price stability, fueling bets on higher interest rates.
Meera Chandan, JPMorgan’s co-head of global FX strategy, said the Fed has activated a positive dollar outlook. She noted other central banks are unlikely to match the pace, keeping the rate gap favorable for the currency.
US economic performance is outpacing much of the world. Artificial intelligence is driving corporate spending and stock market inflows, with investors anticipating productivity gains that could further support the dollar.
This reverses last year’s trends, when themes like de-dollarization dominated discussions. The currency also gained earlier as investors sought safety following February’s attacks on Iran, with the US’s role as a top oil producer providing additional support.
The Bloomberg Dollar Spot Index rose 2.1% in June, nearly matching its March rally. It is now near the highest level since November.
Related: Hard Money vs. Traditional Loans for Buying Commercial Properties
The dollar has climbed even as Treasury Secretary Scott Bessent reaffirmed support for a strong dollar policy, stressing that policy certainty drives its dominance.
Man Group Plc expects a 5% dollar rally by year-end, while TD Securities forecasts a 2% gain in the third quarter. Jayati Bharadwaj, TD’s head of FX strategy, pointed to resilient US data and Warsh’s stance as key drivers, stating the threshold for Fed rate hikes is now lower.
Not all analysts foresee a straight upward path. Bharadwaj noted the Fed would need to exceed current market expectations of one or two quarter-point hikes for a sustained advance. Barclays PLC strategists warn the rise may slow, as rate hikes are already priced in and economic data may have peaked.
Hedge funds and asset managers have placed heavy bets on the dollar. As of June 16, they held $29.4 billion in wagers on its strength, according to the filing.
Kamakshya Trivedi, Goldman’s chief foreign-exchange strategist, attributed part of the momentum to the AI trade, which is lifting growth expectations and equity returns in the US, drawing capital.
Related: Everything that a Trader must know about CAPM
Goldman expects the dollar to strengthen against lower-yielding currencies, particularly those tied to oil prices, but lag behind high-yield options like the Mexican peso. Trivedi added that discussions about reducing dollar exposure have faded, with investors no longer increasing hedge ratios.
European Central Bank President Christine Lagarde recently reduced rate hike expectations, pushing the euro to a one-year low. Bank of America now forecasts the euro at $1.15 by year-end, anticipating three Fed rate hikes in 2024.
Some strategists caution the rally’s speed may not last.
The cost to hedge against a dollar rise over the next year remains near a five-year average, though still below past peaks of US economic dominance.