The U.S. dollar has broken out of its post-2022 trading range, supported by strong U.S. economic performance, a widening interest rate differential, and elevated tariffs. Analysts at Capital Economics predict the dollar will continue to climb in the coming year, citing these factors as key drivers.
“We expect the dollar to gain further ground next year as the U.S. economy continues to outperform, the interest rate gap with other G10 countries widens slightly, and higher tariffs are implemented by the administration,” Capital Economics stated in a recent analysis.
The dollar’s breakout from its previous range signals growing investor confidence fueled by solid U.S. economic data and favorable policy expectations. However, Capital Economics highlighted that a major risk to this bullish outlook is the possibility of an economic recovery in other regions, similar to the rebound seen in 2016.
After the 2016 U.S. election, global economic activity picked up, while anticipated U.S. tax cuts were delayed until late 2017, and the Federal Reserve adopted a more dovish stance than markets had anticipated. These developments led to a 10% decline in the DXY index that year, marking its worst annual performance in two decades.
While a recovery in Europe and Asia currently appears unlikely, Capital Economics cautioned that a positive surprise in global growth cannot be entirely dismissed. Such a development could challenge the dollar’s upward trajectory, as it did in the past.
For now, the firm’s outlook remains optimistic, driven by expectations of continued U.S. economic strength and policy divergence with other major economies.
