Dollar poised for comeback as fears ease

The U.S. dollar, previously weakened by fears of an economic slowdown and aggressive Federal Reserve rate cuts, is showing signs of a potential rebound. These concerns are diminishing as the U.S. economy demonstrates steady expansion, with upward revisions to growth projections for 2026 and resilient labor markets. The International Monetary Fund and the Fed project U.S. real GDP to expand around 2.4% and 2.3% respectively, indicating continued growth rather than recession.

Market worries about the Federal Reserve's independence have also eased following the nomination of Kevin Warsh, perceived as disciplined and committed to maintaining the Fed's credibility. Furthermore, trade tensions, initially feared to be inflationary and growth-negative, have not materialized as expected. Instead, tariff revenues have surged, contributing positively to fiscal revenues and supporting the dollar.

Geopolitical events, such as rising tensions with Iran, have reinforced the dollar's status as a preferred safe-haven asset. Capital is flowing towards the deep, liquid, and safe U.S. Treasury markets. The relative weakness of the Euro and Pound, which constitute a significant portion of the U.S. Dollar Index, also contributes to a more favorable outlook for the dollar.

Globally, the dollar's strength is underpinned by its safe-haven appeal and the relative economic performance of other major economies. The Indian rupee, in particular, faces pressure due to rising Indian defense commitments, a widening merchandise trade deficit, and the Reserve Bank of India's forward position, all of which contribute to structural dollar demand. The USD/INR pair is expected to move towards 92.00 in the near term.