Brown Brothers Harriman says the US Dollar Index (DXY) may push beyond the top of its roughly one-year 96.00–100.00 band in the near term, as US activity outperforms other economies and offsets any USD headwind from improved sentiment linked to the Iran war. The Atlanta Fed GDPNow model is tracking annualised real GDP growth of 4.3% in Q2 versus 2.0% in Q1, while May PMI readings point to a widening US growth advantage over peers.
Attention turns to April PCE, due Thursday. Headline PCE is forecast at 0.5% m/m and 3.8% y/y, compared with 0.7% m/m and 3.5% y/y in March; core PCE is seen at 0.3% m/m and 3.3% y/y, unchanged from March. Both measures remain above the FOMC’s 2026 inflation projection of 2.7%, keeping a firmer Fed stance in focus. Alternative gauges cited include the Dallas Fed trimmed mean PCE and the Cleveland Fed 16% trimmed mean CPI, both below core PCE, while recent comments from Christopher Waller pointed to holding rates, with hikes still possible if inflation fails to ease.
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US Dollar Strength Supported by Economic Outperformance
We are sticking to our view that the US Dollar Index (DXY) will likely overshoot the top of its 100.00 range in the coming weeks. The US economy is showing remarkable resilience compared to its peers. This strength suggests derivative traders should consider positions that benefit from a rising dollar against currencies like the Euro and Yen.
The Atlanta Fed’s GDPNow model is forecasting a strong 4.3% annualized growth for this quarter, a significant jump from the previous one. Recent data backs this up, with the S&P Global US Composite PMI for May hitting 54.4, its highest level in two years, while the flash Eurozone PMI registered a more modest 52.3. This widening growth gap is a key driver for dollar strength.
Inflation remains a major factor, and the Federal Reserve is unlikely to cut interest rates soon. The April Consumer Price Index (CPI) report already showed core inflation holding firm at 3.6%, and the upcoming Personal Consumption Expenditures (PCE) data is expected to confirm this trend. With inflation well above the Fed’s target, the central bank’s restrictive stance will continue to support the dollar.
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Trading Strategies and Outlook for the US Dollar
For traders, this means looking at buying call options on dollar-centric ETFs like UUP, targeting strike prices just above the current 100.00 level. Governor Christopher Waller’s recent comments about not ruling out further rate hikes only adds conviction to this bullish outlook. This strategy offers a defined-risk way to capture potential upside from a dollar breakout.
Another approach is to short the Euro against the dollar, perhaps through futures contracts or buying put options on the EUR/USD pair. The interest rate differential between the aggressively postured Fed and a more cautious European Central Bank is likely to widen. Historically, when the DXY breaks out of a year-long consolidation, the subsequent move is often swift and significant.
We recognize that some Fed officials, like Chair Kevin Warsh, may be looking at softer inflation metrics, creating some internal debate. However, the center of gravity at the Fed has clearly shifted to a more hawkish position. We believe the path of least resistance for the dollar is higher in the near term.
