Research Briefing | May 30, 2024

Why dollar strength looks set to go on

The strength of the US dollar looks likely to continue this year and into 2025 before possibly waning in 2026, according to our analysis. Relatively robust US growth, favourable interest rate differentials, and structural improvements to the US balance of payments are all dollar positives.

What you will learn:

  • The dollar’s real effective rate is up 9% since the start of 2022 and is around 10% above its long-term trend. But the current bout of dollar muscularity is far from unprecedented. Previous dollar peaks have been considerably higher than this, and our BEER framework suggests only moderate dollar overvaluation of around 6% currently. So valuation levels don’t appear to be an obstacle to further dollar gains.
  • A mix of short-term cyclical factors and longer-term structural factors are benefitting the dollar. Growth differentials between the US and other G7 economies have been high recently and consistently positive for some time. Short- and long-term interest rate differentials are dollar supportive, and the US’s shift to a net energy exporter and strong FDI are also helpful.
  • Our updated dollar strength framework, which assesses the dollar outlook across a range of variables, shows a clear dollar-positive outlook. This analytical framework, which signalled the current period of dollar gains, points to dollar strength persisting during 2024 and 2025, in line with our baseline forecasts.
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