BCA Research has observed a divergence between the US dollar's performance and global growth trends.
Traditionally, the dollar moves inversely to global growth, as capital flows from the US to the rest of the world during periods of global economic acceleration, increasing demand for foreign currencies and decreasing demand for the dollar.
However, the firm notes that this typical relationship has not held this year. Despite a revival in the global manufacturing cycle and significant gains in global equity markets, the US dollar has strengthened.
BCA Research attributes this anomaly to two main factors: the US being a major driver of the global growth revival, while Chinese demand remains weak due to domestic deflationary forces and insufficient stimulus efforts.
Additionally, interest rate differentials have supported the dollar as persistent price pressures have delayed Federal Reserve rate cuts, whereas other major central banks are moving towards more dovish policies.
However, the firm says that growth is beginning to shift outside the US, which could lead to a decline in the dollar's value in the near term. Technical indicators also suggest that the dollar is currently overbought.
Despite this, BCA Research's FX strategists maintain a tactically neutral stance due to the dollar's favorable interest rate differentials.
Looking ahead, BCA Research expects global economic conditions to deteriorate, potentially restoring the traditional inverse relationship between the dollar and global growth. A recession originating in the US would likely trigger a global recession, maintaining support for the dollar due to its defensive nature.