US Dollar Strength Driven by Cyclical Forces, Despite Structural Challenges

According to Qatar National Bank's (QNB) analysis, cyclical factors are driving the US dollar's strength against most major currencies in 2026. Despite structural challenges persisting in weighing on its long-term outlook, including an overvalued real exchange rate and ongoing fiscal and trade deficits, the dollar has remained robust due to these temporary forces.

QNB highlighted three critical factors supporting the dollar's resilience: interest rate differentials, AI and technology-driven equity market performance, and US economic growth. The bank noted that interest rates in the US have increased significantly compared to other advanced economies, making dollar-denominated assets more appealing to foreign investors. The US Federal Reserve's policy approach has also contributed to this effect, with markets now foreseeing policy rates staying elevated for an extended period.

The widespread adoption of AI has spurred a large wave of investment in digital infrastructure, covering semiconductors, data centers, cloud computing, and power grids. As the global frontrunner in AI innovation, the US has captured a disproportionate portion of this investment, fueling strong corporate profits and ongoing stock market outperformance.

US economic growth continues to surpass that of other advanced economies, with activity indicators suggesting stronger momentum than in other major advanced economies. The US composite PMI has consistently stayed well above the 50-point expansion mark, indicating growth in both services and manufacturing.