J. Safra Sarasin: Renewed US growth outperformance supports the dollar
13 OCT, 2026
By Claudio Wewel from J. Safra Sarasin
The dollar rallied significantly in September, with the DXY dollar index rising from 99 to the upper end of its 12-month trading range at around 102. Over the same period, EUR-USD fell from 1.17 to around 1.12, while USD-CHF rose from 0.79 to 0.83.
Strong September US data challenge our previous bearish dollar view
Over the summer, our bearish view on the dollar rested largely on the expected convergence between US and non-US growth over the medium term. However, the strong rebound in US macroeconomic indicators across the board calls this view into question, with September data pointing to renewed US growth outperformance:
- The labour market looks far less vulnerable than feared, with unemployment at multi-decade lows.
- Both capital expenditure and retail sales rebounded significantly from July levels, confirming that business investment and consumer spending remain on a solid footing.
- Perhaps most importantly, August PMIs reached five-year highs, with services at 58.7 and manufacturing at 57.0.
Cyclical momentum is feeding into inflation – and renewed US-Iran conflict adds further price pressure
Meanwhile, the strong rebound in cyclical momentum is leaving its mark on inflation. Although the latest PCE report came in weaker than expected, the CPI data look less encouraging. Consumer prices rose by 0.4% in August, reflecting a surge in import prices. Looking ahead, the resumption of US-Iran hostilities in early September will be an additional source of price pressure, as higher energy costs gradually feed through to the rest of the economy.
US rate expectations have risen faster than elsewhere in the G10 – the main driver of recent dollar strength
US rate expectations have risen sharply as markets have realised that inflation is still too high for the Fed to declare victory. The repricing of the Fed's expected rate-hike path has been particularly pronounced relative to the rate trajectories of other G10 central banks, which had already adjusted significantly before September. This largely explains why the dollar has strengthened in recent weeks.
The dollar's path will hinge on whether the US economy can sustain its momentum
Going forward, the dollar's performance will depend mainly on the US economy and its ability to sustain its current momentum over the medium term – or whether the recent acceleration in macro dynamics represents a "cyclical overshoot". While we are aware that PMI readings have reached very high levels, and acknowledge that higher interest rates should start to weigh on US activity, we expect this to happen only with a certain lag. Second, a measured path of rate hikes (rather than back-to-back increases) should give the US economy the time it needs to adjust to higher rates. Third, unlike during the subprime crisis, there is virtually no evidence that the rise in interest rates since 2022 has caused significant stress in the US housing market.
We expect the US economy to maintain its momentum through 2027, helped by the AI-driven wealth effect
We therefore do not expect the strength of the US business cycle to change significantly over the medium term. Our base case assumes continued AI-related investment, which should account for roughly one third of GDP growth in 2026. And while growth remains concentrated in the build-out of AI infrastructure, we expect the wealth effect from AI-driven growth to keep feeding through to the rest of the economy. Against this backdrop, the US growth differential with the rest of the world is unlikely to narrow. Given our forecast of a terminal US policy rate of 5% at the end of 2027 – slightly above current market pricing – the dollar's rate advantage over most G10 currencies, including the euro, is set to widen from here.
Risks are tilted towards further dollar strength, but likely easing energy prices in 2027 should cap the upside
In our view, the significant shift in US growth and rate trajectories relative to other G10 economies materially changes the medium-term outlook for the dollar, tilting the balance of risks towards a strong-dollar scenario. And although the expected policy divergence between the Fed and most other G10 central banks could point to an even steeper upward path, we are inclined to think that a substantial part of the Fed's anticipated tightening is already priced in. We also note that a moderation in energy prices in 2027 should limit the dollar's upside. Finally, in the short term, the deepening political crisis in France and renewed concerns over French fiscal sustainability are a further tailwind for the dollar, while weighing on the euro.
