Capital Economics Suggests the Worst May Be Over for the US Dollar

Capital Economics: The US Dollar May Have Passed Its Toughest Phase

The US dollar appears to be on track for its first weekly gain since mid-March, signaling a potential shift in sentiment. Analysts at Capital Economics believe that the worst could be behind for the world’s primary reserve currency.

As of 15:40 Turkish time, the US Dollar Index — which measures the greenback against a basket of six major currencies — climbed 0.2% to 99.385, following a sharp rebound from its recent three-year low in the previous session.

In a research note dated April 25, Capital Economics stated:
“As the traditional relationship between the dollar and interest rate differentials begins to reassert itself, we expect the dollar to regain some lost ground over the coming months.”

Dollar’s Recent Weakness Defied Market Norms

The dollar’s decline since “Independence Day” has puzzled analysts, running counter to established economic theory and past market behavior — such as during the 2018–2019 US-China trade war, when tariffs were associated with a stronger dollar.

Even more unusual has been the dollar’s decline despite yield differentials moving in its favor. Capital Economics notes that this disconnect reflects deeper issues in global markets.

A breakdown in bond market dynamics, coupled with uncertainty surrounding U.S. policymaking, has likely eroded investor confidence in the narrative of American exceptionalism. These factors have disrupted typical patterns and contributed to the dollar’s weakness.

Short-Term Rebound Possible, Long-Term Outlook Mixed

Looking ahead, Capital Economics sees room for a short-term recovery as interest rate spreads once again support the greenback. However, they caution that longer-term confidence in the U.S. as a safe haven may remain subdued.

The firm also highlights that unorthodox policies under the Trump administration have further undermined global trust in the dollar. Nevertheless, in the absence of a credible alternative, the dollar is expected to maintain its role at the center of the global financial system — at least for the foreseeable future.