Rangebound dollar likely to fade towards year end

The US dollar has edged higher over the past quarter or so, driven by the twin tailwinds of rising Treasury yields and US equity outperformance. We think these factors may continue to support the greenback over the near term, and the looming prospect of a second Trump presidency skews these risks around the dollar to the upside. That said, we think there is limited scope for broad-based strength in the dollar from here for two reasons. For one, while we expect US equities to outperform those elsewhere for some time yet, our base case is that Treasury yields will fall by the end of the year and shift yield gaps in favour of other major currencies as the Fed (finally) sees more progress in inflation reaching its 2% target. More importantly, the remarkable strength of the US economy is beginning to fade. For example, economic data surprises in the US are now undershooting expectations relative to other major economies, which has generally coincided with periods of dollar weakness. Taken together, we think the next major move in the greenback will be lower. We forecast the DXY index to end this year around 106, near its current level, before falling to ~98 by the end of 2025.