Dollar: Growth Advantage Narrative Supports Rally - BBH

The dollar continues its rally, with Brown Brothers Harriman analyst Elias Haddad noting that U.S. economic data and policy dynamics continue to underpin the greenback, as markets await upcoming U.S. PMI data to confirm this growth advantage narrative.

**Growth Outperformance Expectations Form Core Support**

Haddad expects September U.S. PMI data to confirm the U.S.'s growth leadership relative to the eurozone, the UK, and Japan. If validated, this expectation would further strengthen the dollar's fundamental advantage over major non-USD currencies. Meanwhile, the widening two-year bond yield spread between the U.S. and G6 countries provides additional interest rate support for the dollar. Solid U.S. economic activity and a stable labor market keep markets positioned for a relatively tighter Fed policy stance in the near term.

**Rates and Policy Expectations Remain Key Variables**

According to BBH analysis, the dollar has extended its prior upward momentum, supported by the widening two-year yield spread between the U.S. and G6 nations. Favorable U.S. economic data and labor market stability imply that Fed rate hike expectations will continue to play a role in the near term, forming the policy foundation for dollar strength. However, Goldman Sachs FX strategist Isabella Rosenberg has previously cautioned that if market focus shifts from inflation consequences to growth concerns, the dollar's rally could slow, boosting the appeal of the yen and Swiss franc as safe-haven currencies.

**Risk Factors Worth Noting**

Despite the dollar's current strong posture, some institutions remain cautious about the sustainability of the rally. According to Bloomberg Intelligence strategists, any trigger driving dollar strength is unlikely to persist, and as markets refocus on U.S. fiscal sustainability, the dollar's safe-haven status could gradually erode. Barclays' team also notes that amid heightened volatility in AI-related stocks, the symbolic support logic of the tech sector for dollar assets is being tested. These factors suggest that while the dollar's rally underpinned by growth advantages remains intact, the pace of upside carries uncertainty.