Cyclical Factors Offset Structural Pressures for US Dollar
According to Qatar National Bank's latest weekly economic commentary, cyclical factors are driving the US dollar's resilience against major peers, despite mounting structural headwinds.
The report notes that while the US dollar faces pressure from an overvalued real exchange rate, persistent fiscal and trade deficits, and central bank reserve diversification, these trends have not yet led to a significant decline in its value.
In fact, interest rate differentials remain a key driver of currency movements, with higher US rates making dollar-denominated assets more attractive to investors. The Federal Reserve's shift towards a more hawkish stance under Chair Kevin Warsh has led to a reassessment of policy outlook, and markets now expect rates to remain higher for longer.
The report identifies three key factors supporting the US dollar: interest rate differentials, sustained foreign demand for US financial assets driven by AI investment, and continued US economic outperformance. QNB notes that while these cyclical factors will continue to dominate in the near term, structural headwinds will eventually shape the dollar's long-term trajectory.
The commentary concludes that despite the dollar's resilience, a gradual depreciation is likely over the longer term due to mounting structural pressures.