According to BNY's Geoff Yu, the recent strength of the US Dollar (USD) is attributed to a positive terms-of-trade shock and robust trade-weighted holdings, with limited downside rebalancing pressure at present [1]. While the USD has experienced some flow losses to the Canadian Dollar (CAD) and Chinese Yuan (CNY), it continues to perform well against the Euro (EUR), Japanese Yen (JPY), and Mexican Peso (MXN), which has kept overall dollar holdings elevated on a trade-weighted basis [1].
Yu notes that the dollar is not expected to play a significant role in the upcoming FOMC decision, but recent months have seen a net loosening in financial conditions due to increased demand for dollar liquidity stemming from ongoing conflict [1]. Previous concerns regarding the erosion of US competitiveness have diminished, as the US is currently benefiting from favorable terms of trade, reducing the need for policy intervention against dollar strength [1].
Despite some outflows, the current environment suggests that the threshold for technical USD selling remains high, indicating that significant downward pressure on the dollar is unlikely in the near term [1].
CONCLUSION
BNY's analysis highlights that the US Dollar's current strength is underpinned by positive trade dynamics and sustained demand, with only limited outflows to select currencies. The outlook suggests that, barring major shifts, the USD is likely to remain resilient, with a high bar for technical selling.