While the idea of US growth re-acceleration is driving dollar strength, it's not the only story. Recent positive surprises in European PMI data and upgraded Chinese GDP forecasts suggest broader global growth resilience. This breadth should help cap the US dollar's rally and may promote weakness against other currencies.

Despite a popular bearish narrative, the U.S. Dollar has a strong bullish case. The U.S. economy is accelerating while Europe and Japan face stagflation, and record short positioning creates fuel for a squeeze. The argument is that U.S. stocks are essentially levered U.S. dollars, and relative strength will attract capital.

The firm's initial 2026 forecast shifted from bearish to bullish on the dollar due to US economic exceptionalism and yield supremacy, while maintaining a positive view on beta trades like FX carry. This dual-bullish stance is unusual and forms their core macro theme.

Last year's dollar weakness was driven by two factors no longer present: softening US data and outperforming European growth. With European data and equities now cratering, the narrative is shifting back to US exceptionalism. This suggests any dollar weakness from geopolitical de-escalation will be short-lived, with a return to strength likely.

The influence of AI on FX is shifting from a simple risk-on driver for carry trades. As The US uses AI for geopolitical leverage via export controls, it could widen economic divergences with other nations, creating a 'US exceptionalism' scenario that is bullish for the dollar.

The Fed's long-standing asymmetric dovish reaction function, which has weighed on the dollar, is neutralizing. Internal dissents and Chairman Powell's commentary signal a more balanced policy stance, which could shift from being a dollar headwind to a tailwind depending on incoming economic data.

The US dollar has been trading cheaply relative to interest rates. A hawkish Fed outcome could trigger a rally as the currency closes this 'misvaluation' gap, even if short-term rates don't reprice significantly. This suggests the dollar has a valuation-based tailwind independent of immediate policy moves.

Systematic growth momentum signals turning negative across a wide set of 28 countries acts as a powerful, counter-cyclical indicator. This broad-based global economic weakening points towards relative US dollar strength, providing a systematic justification for a long dollar position.

Analyzing historical Fed hiking cycles provides a quantitative framework for the dollar's trajectory. A conservative 75 basis point cycle, combined with the dollar's historical beta to rates and its current cheapness versus rate models, suggests a reasonable base case of 3% appreciation.