Cyclical Factors Bolster US Dollar Despite Structural Headwinds

Qatar National Bank's latest weekly economic commentary points out that despite mounting structural headwinds, cyclical factors remain the dominant drivers of the US dollar's resilience against major peers.

The report notes that in recent years, the US dollar has faced increasing pressure from overvalued real exchange rates, persistent fiscal and trade deficits, and the gradual diversification of international reserves by central banks. However, these structural headwinds have been offset by cyclical factors, which continue to drive the currency's strength.

According to QNB, interest rate differentials remain a key driver of currency movements, with higher US rates making dollar-denominated assets more attractive and increasing demand for the currency. The report also highlights the role of AI-driven investment in digital infrastructure, including semiconductors and data centers, which has triggered significant foreign capital inflows into the US.

The QNB commentary concludes that while structural headwinds will likely impact the US dollar's long-term trajectory, cyclical factors will continue to dominate its near-term performance. Higher interest rates, sustained foreign demand for US financial assets, and continued US economic outperformance are expected to remain key sources of strength for the currency.