BlackRock sees stable dollar amid shifting rate expectations

BlackRock's Portfolio Strategist Michel Dilmanian has highlighted the surprising resilience of the U.S. dollar, attributing it to fundamental drivers such as rate differentials. This resilience counters the narrative of the dollar's debasement, though it does not indicate the start of a sustained upswing. Over the past 18 months, the dollar has experienced significant fluctuations, dropping after the 'Liberation Day' tariffs, stabilizing briefly, and then weakening as investors questioned the Federal Reserve's credibility. Recently, it has rebounded due to a sharp repricing of Fed rate expectations, which has pushed U.S. two-year yields higher relative to other developed markets.

Dilmanian cautions that market expectations for as many as four interest rate hikes over the next year are likely overdone. If investors scale back these expectations, yield differentials could narrow, potentially weighing on the dollar. This scenario would align with BlackRock's broader pro-risk stance and support its overweight position in emerging market equities. However, the dollar's strength is also supported by strong U.S. growth, robust corporate earnings, and significant investment in AI, which have driven foreign investment into U.S. assets.

Despite these factors, BlackRock does not see room for another sustained dollar rally. The firm expects the dollar to remain around current levels or weaken slightly. This outlook reinforces skepticism regarding the debasement narrative around the dollar. If investors were losing confidence in the dollar's long-term role, more pronounced weakness would likely be observed.