This month is shaping up to be one of the strongest for the dollar in the past year, as a growing number of Wall Street banks anticipate a reversal in its fortunes.
Strategists at major institutions, including JPMorgan Chase & Co., Bank of America Corp., and The Goldman Sachs Group, Inc., have renewed their faith in the greenback. This shift follows a pledge from Federal Reserve Chairman Kevin Warsh to restore price stability, which has reignited bets on interest rate hikes.
Meera Chandan, Co-Head of Global FX Strategy at JPMorgan, noted in an interview that the Fed has effectively "activated" a bullish outlook for the US currency.
In recent weeks, the market narrative has pivoted, reviving speculation that "American exceptionalism" will continue to underpin US assets. Data indicates the US economy remains resilient compared to other global regions. Concurrently, the artificial intelligence boom continues to drive significant corporate investment and capital inflows into equities, with investors betting that productivity gains will further bolster the dollar.
This marks a U-turn from the situation over a year ago, when themes like "hedging America," de-dollarization, and shorting the dollar were prevalent. Those narratives have since faded.
Even before Warsh took the helm, the dollar had begun strengthening as investors sought safe-haven assets following attacks on Iran in February. The US's status as the world's top oil producer also lent support to the currency after a spike in crude prices, though oil has since retreated to pre-conflict levels.
"What's really driving the market now has shifted from energy to the Fed's response," Chandan stated.
The Bloomberg Dollar Spot Index has climbed 2.1% so far in June, nearly matching the gains driven by oil in March. The index is currently near its highest level since November and is up 1.7% year-to-date.
The Fed's hawkish stance isn't the only factor encouraging dollar bulls. US Treasury Secretary Scott Bessent has recently spoken more explicitly about a strong dollar policy while publicly backing Chairman Warsh. However, Bessent noted that it is the certainty of US policy, not the exchange rate, that drives the dollar's dominant role in the global economy.
Against this backdrop, hedge fund Man Group forecasts the dollar to appreciate by roughly 5% by year-end, while TD Securities predicts a 2% rise in the third quarter.
"We have resilient US data, strong economic activity, and a new, more hawkish-leaning chair talking about policy, credibility, and price stability," said Jayati Bharadwaj, Head of FX Strategy at TD Securities. "The bar for the Fed to hike is lower now, and that's a shift in market perception."
Challenges remain ahead. Bharadwaj pointed out that for a more pronounced dollar rally, the Fed would need to deliver more rate hikes than the market currently expects, which is pricing in roughly one to two 25-basis-point increases by early next year.
Some signals suggest the dollar's advance may slow in the second half of the year. The cost to hedge against dollar strength against a basket of currencies over the next 12 months, relative to the cost of hedging against weakness, is near its highest level in over a year and close to its five-year average. However, it remains below the levels seen the last time "American exceptionalism" dominated market talk.
Strategists at Barclays Plc argue that "the path for the dollar is unlikely to be linear," given that markets have already priced in Fed hikes, sentiment is very bullish, and both oil prices and US data may be peaking.
For Alex Cohen, a currency strategist at Bank of America, the dollar "has further room to run." The bank stated on Thursday that it has sharply revised its year-end forecast for the euro from $1.20 to $1.15, anticipating the Fed will implement three rate hikes this year.
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