Where is the U.S. dollar headed?

Every other week, we ask for your thoughts on a top question our portfolio managers and strategists are debating. We share the final poll results and insights.

A prolonged period of U.S. dollar strength has reversed abruptly, driven by a return of risk appetite and a collapse in interest rate differentials between the dollar and other currencies. Will a strong dollar return? And is the currency entering a new regime?

Poll results, Where do you see the U.S. dollar over the next five years?

A third of respondents to our public poll saw a weaker U.S. dollar heading into a new regime, characterized by higher U.S. inflation compared to the rest of the world. Potential triggers for such a regime shift could be deglobalization, reduced competition among large firms or a lack of guardrails around coordinated fiscal and monetary expansion. The Fed’s more tolerant approach to inflation overshoots could also tilt inflation risks to the upside.

Close to one fourth of voters saw the U.S. dollar weakening on the back of reflationary policy, but without a major regime shift.  Close to a fifth saw a bigger shift afoot – with potential for the dollar’s reserve currency status to erode as alternatives such as the euro and Chinese yuan gain favor.

BlackRock’s take: In contrast, a plurality of BlackRock portfolio managers saw the dollar “stronger in the same regime.” The reason: many believe U.S. growth should again outperform that of developed market peers over the coming five years, with this growth gap eventually set to be reflected in interest rate differentials.

Overall though, BlackRock’s portfolio managers were evenly split on whether the U.S. dollar would be stronger or weaker over the next five years, and on whether there’ll be a dollar regime change. “Many models lie broken on the shore!” quipped one fixed income portfolio manager, reflecting the difficulty of forecasting currency movements.

The BlackRock Investment Institute sees scope for dollar weakness to persist in the near term as the drivers for its recent decline – the policy revolution that has eroded the dollar’s interest rate advantage and a revival of risk appetite – remain in place. We believe U.S. rates will remain lower for longer - especially now that Fed Chairman Jay Powell has announced a move to average-inflation targeting.

The longer-term outlook is harder to gauge. A key question is the currency implications of the policy revolution – especially if and how central bankers build guardrails to manage growing balance sheets in the face of greater fiscal deficits and debt issuance. The prospect of the dollar retaining its perceived safe-haven status is another concern. We are weighing these factors as a contentious U.S. presidential election looms.

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