Episode summary
Why the US Dollar Could Continue to Strengthen
The Markets
· · Hosts: Chris Hussey · Guests: Brian Dunne
Summary
Brian Dunne argues the dollar can keep strengthening because the market is still underpricing several supportive forces: a more hawkish Fed, persistent US exceptionalism tied to AI and strong corporate earnings, and geopolitical risk from the US-Iran conflict. He says those factors helped drive dollar strength in the second quarter and early third quarter, and that real rate differentials still favor the greenback even if the Fed simply stays on hold.
He also pushes back on the idea that dollar “debasement” is imminent. While reserve diversification may continue gradually, he says there has been no meaningful shift toward replacing the dollar in global reserve use, and the feared move to yuan pricing in the Strait of Hormuz has not materialized. On Japan, he expects continued yen weakness because Japanese policy remains too easy relative to inflation, though pension allocation changes could alter that outlook.
For positioning, Dunne says the market is set up for carry, but his preferred expression is long dollars versus G10 funding currencies. He specifically likes dollar strength against Swiss and sees dollar-CNH as a hedge, using options to capture what he thinks could be a 2% to 4% higher dollar versus many currencies.
Key takeaways
- Dunne says the strongest support for the dollar is a combination of geopolitics, US exceptionalism, and a Fed that may be more hawkish than markets price.
- He thinks the market still underprices the chance of a hawkish Fed shift, even after some reversion in rate expectations.
- He says real rate differentials still favor the dollar into year-end, even if the Fed does not raise rates immediately.
- He does not see near-term evidence that reserve diversification is displacing the dollar as the dominant reserve currency.
- He expects the yen to stay under weakening pressure unless Japanese fiscal, monetary, or pension policy changes materially.
- His preferred trade is long dollars versus G10, especially Swiss, with dollar-CNH calls as a hedge against geopolitical or Fed surprises.
Notable quotes
“I think there's three things that have really driven dollar strength”
“the distribution of outcomes where the Fed does shift to a more hawkish policy are still underpriced”
“I really like using options to express that”
“I really like dollar higher versus Swiss”
How the episode opens
This is the markets. I'm Chris Hussy and today is Thursday, July 9th and I'm here on the Goldman Sachs trading floor with Brian Dunne who is head of America's foreign exchange options trading within global banking and markets. Brian, thanks so much for joining us.
Thanks for having me. Okay, what's going on with the dollar here? Is this a strong dollar year?
It seems like it's shaping up to be. If I look at the second quarter and what we've the small amount that we've had in the third quarter so far, I think there's three things that have really driven dollar strength. The first uh has been the conflict between the US and Iran.
The second part has been um you know the the AI trade has largely remained intact and so that's more of a story about US exceptionalism given that most of the major companies on the forefront of the AI boom are denominated in the US and corporate earnings have remained exceptionally strong and then third which is the most recent development has been a potential shift in Fed rate path to a more hawkish approach that's focused on price stability rather than you know also recognizing the downside um the downside side tails to growth because largely the labor market has been, you know, has been very strong. Yeah. Let's let's talk about the Fed for a second here because we just got the Fed meeting minutes this week which was interesting.
Is the Fed as hawkish as markets thought a month ago? Well, I I I think we'll see. My instinct was that the moves that we saw immediately after Chairman Worsh's first press conference was a little bit of a positioning move.
We've seen a decent reversion in pricing. Um, but we still have six or seven basis points priced for July and I think we have a little bit more than a full hike price for for the end of the year.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- us dollar strength
- fed policy
- interest rate differentials
- geopolitical factors
- fx options
Companies and tickers mentioned
- GS
- Goldman Sachs
Watch the episode
Watch “Why the US Dollar Could Continue to Strengthen” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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