The U.S. dollar has had a sluggish ride over the past year, with market sentiment increasingly skewed to the downside. Concerns over rising debt levels, trade tensions, and inconsistent policy signals have led to questions about the greenback’s future. However, recent insights from BCA Research suggest that these bearish views may be missing an important part of the picture. In the short term, there are still solid reasons to expect the dollar to show resilience – perhaps even strength over the next 6 to 12 months – as global uncertainty continues to build.

The Dollar’s Recent Slide: Not the Whole Picture

There’s no shortage of factors weighing on the dollar – fiscal concerns, questions about the U.S. policy direction, and the belief that America may be more exposed to global trade disputes than its peers. But these headwinds, while real, may be overstated in the near term. Several structural and cyclical factors could support the greenback in the months ahead.

1. Global Slowdown and Flight to Safety

When the global economy falters, investors tend to seek safe-haven assets – and historically, that’s meant buying U.S. dollars. Signs of softening growth in Europe and China, combined with geopolitical uncertainty, have the potential to drive capital back into the U.S., even if domestic conditions are not perfect.

2. U.S. Tech as a Magnet for Capital

American tech companies continue to deliver solid earnings, even amid slowing global demand. Their global dominance, high margins, and growing AI integration make them attractive investment destinations. As foreign capital flows into U.S. equities, it naturally supports the dollar.

3. The “Dollar Smile” in Play
According to the widely cited “Dollar Smile” framework, the greenback tends to appreciate in two scenarios: when global risk appetite disappears (and investors seek safety), or when the U.S. economy outperforms. BCA believes the left side of the smile – defensive dollar strength during global weakness – is likely to come back into play as global growth decelerates.

A Structurally More Resilient Economy

The U.S. economy is less exposed to global trade swings than many of its peers. Compared to export-heavy economies, America relies more on services – especially in areas like finance, tech, and intellectual property. These sectors tend to be more stable across cycles. The U.S. also benefits from a large, diversified domestic market and relative energy independence. All of this helps buffer the economy from external shocks and adds to the dollar’s safe-haven appeal.

Misperceptions About Trade Policy Impact

There’s a growing belief that U.S. trade policies are more damaging to the domestic economy than to global peers. But much of the recent strength in international economic data may be misleading. BCA Research points out that a lot of this uptick is due to “tariff front-loading”, companies rushing to import goods before tariffs hit. Once that effect fades, global momentum may slow more sharply than expected, leaving the U.S. looking comparatively stable.
And while markets worry about a full-blown trade war, the U.S. administration has shown some flexibility, walking back certain policies in response to market feedback. That pragmatism could help ease fears and reduce the longer-term risk premium on U.S. assets.

Fiscal Risks: Serious, But Not Immediate

It’s true that U.S. debt is growing at a concerning pace. Proposals like the “One Big Beautiful Bill Act” could exacerbate budget pressures. Interest costs are rising, and the long-term path isn’t sustainable without reform. But in the near term, those risks may be offset by capital inflows into U.S. Treasurys, especially if a global slowdown intensifies. In moments of stress, investors still view U.S. government debt as a safe asset.

U.S. Financial Assets Remain Competitive

From an investment perspective, the U.S. remains attractive. Long-dated Treasurys offer yields that outpace many developed markets, and the depth and liquidity of American financial markets remain unmatched. Meanwhile, U.S. equities – though more expensive than some global peers – continue to deliver stronger earnings, particularly in tech. That combination of safety and growth keeps the dollar in demand.

Long-Term View: Risks Building

While the next 6 – 12 months may favour dollar strength, the longer-term outlook is less certain. BCA Research highlights two main concerns: valuation and fiscal sustainability. The dollar is trading above long-term fair value on many models, and if the narrative of “U.S. exceptionalism” begins to unwind, that could weigh on demand for dollar-denominated assets.
If deficits remain unchecked and debt servicing costs continue to climb, confidence in U.S. policymaking could erode, potentially setting up a scenario for a broader dollar revaluation down the line.

What This Means for Investors

In the short term, the dollar looks well-positioned to appreciate, particularly against currencies tied to weaker global growth or commodities. Traders may consider tactical long-dollar positions, especially where risk sentiment remains fragile.
But longer term, a more cautious approach is warranted. Strategic hedging and diversification remain important, especially as the global macro picture continues to evolve and domestic fiscal risks remain unresolved.

Conclusion

Despite recent softness, the dollar’s defensive traits, strong tech sector, and deep capital markets make it likely to find support in the near term, especially if global growth continues to cool. For investors, this presents an opportunity as the dollar may surprise to the upside over the next several months. But over the longer horizon, unresolved fiscal challenges and shifting global dynamics mean the case for structural dollar strength becomes far more uncertain. Remaining versatile and viewing the data trends will be key.

Contact David du Plessis or Evan May should you find this article insightful or if you want to discuss how we can assist your business – phone 021 819 7804 or email dduplessis@wauko.com or emay@wauko.com.