The U.S. dollar: Near-term tailwinds, long-term headwinds

Looking back on my 2026 outlook from about six months ago, my largely positive view on the U.S. economy remains intact. There has been one major unexpected development—the war in the Middle East—that has affected markets, but it has not meaningfully dampened demand in the U.S.

In January, I expressed a negative long-term outlook for the U.S. dollar. That thesis primarily stemmed from the increasingly isolationist tilt of the U.S. administration’s economic policy eroding the U.S. dollar’s dominance as the global reserve currency.

Market view on new Fed chair supports U.S. dollar

My long-term view on the greenback remains negative, although shorter-term factors could support the U.S. currency for the next few months. First, Kevin Warsh’s tenure as chairman of the Federal Reserve has so far been positive for the U.S. dollar. Markets have widely interpreted his stance as hawkish and have started pricing in rate hikes later this year, which would support the dollar with all else equal.

I don’t necessarily agree with the market’s hawkish interpretation of Warsh. While he has not conveyed a dovish message, that is not the same as sending a hawkish signal. I also believe that the votes of the Federal Open Market Committee (FOMC) as a whole are more informative than the stance of the chair. Nevertheless, the market has run with the hawkish interpretation. In a world of less forward guidance, I expect Fed expectations to be more volatile and follow the data releases—which unfortunately are themselves more volatile and potentially lower quality.

Second, ongoing U.S. fiscal expansion has been another key factor in the strength of both the U.S. economy and the dollar. The U.S. administration wants to keep the economy humming along into the November midterm elections, but I expect the impetus to start to wane eventually.  Can capex fill this void?

Look to the rates market to express a positive outlook on the U.S.

In the meantime, I think there are better ways to express a positive short-term view on the U.S. economy than an overweight exposure to the U.S. dollar. In the rates market, for example, I anticipate that the combination of healthy U.S. growth and continued fiscal largesse will push yields on longer-maturity bonds higher, benefiting short positions in 10-year and 30-year U.S. Treasuries in particular.

Long-term U.S. dollar negatives likely to dominate after midterm elections

Looking to late 2026 and beyond, I expect the greenback’s strong run—which began around January 2026—to falter as U.S. fiscal stimulus fades. Some of my colleagues on our fixed income team have become more positive on the U.S. dollar for the longer term, based largely on their outlook for the primarily U.S.-centered artificial intelligence capex boom to continue drawing investment into the U.S.

My view, however, is that the pre-midterm-elections fiscal push has been obscuring the dollar’s longer-term headwinds, including the global trend toward diversifying away from the U.S. dollar as reserve currency. For example, some central banks outside the U.S. have been buying gold to help diversify their reserves.

The direction of current U.S. policy also influences my longer-term outlook for the U.S. dollar. A sustained shift toward more restrictive immigration and trade policies could reduce the country’s ability to attract highly skilled talent and entrepreneurial activity over time. If that were to weigh on long-term productivity and growth, it could also gradually affect the attractiveness of U.S. assets for global investors, potentially creating a headwind for the U.S. dollar.