LIVE MARKETS-The case for a stronger dollar

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THE CASE FOR A STRONGER DOLLAR

Rising geopolitical tensions, yen speculation, and Fed independence concerns have given the dollar a terrible start to the year. However, Capital Economics economist Jonas Goltermann identifies four reasons for a stronger outlook.

1. Targeted Trade Approach

Trump now pursues selective disputes with individual countries, rather than broad tariff wars against all major economies.

2. Stronger Economic Backdrop

Unlike early 2025's growth fears, the U.S. economy is accelerating. This weakens the case for Fed rate cuts, with markets now pricing in fewer reductions.

3. No Viable Alternative

Early 2025 hopes for European economic revival following German fiscal shifts haven't materialized, and the modest recovery will likely disappoint in 2026. China's fiscal stimulus has also had limited impact.

4. Improved Market Positioning

U.S. valuations remain elevated but are less extreme versus peers than a year ago. Sentiment has flipped from overwhelmingly dollar-positive to negative (consensus) or neutral (positioning). Foreign investors have increased FX hedging significantly, limiting room for major shifts.

Goltermann concludes that the economic case for "selling America" is weaker now. Capital Economics forecasts renewed U.S. exceptionalism in 2026, with equity outperformance and dollar recovery expected.

That said, while another major sell-off faces a higher bar, it remains possible. The underlying concern isn't any single Trump policy but the perception that foundational pillars of U.S. economic and financial dominance are eroding.

(Karen Brettell)

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