In recent weeks, a confluence of events has worked in the dollar's favor, even as massive budget deficits, political risks, and an intervention-prone Treasury Department continue to cloud its long-term outlook. The Federal Reserve’s hawkish pivot, the ongoing artificial intelligence boom, and escalating global tensions have combined to boost the dollar's appeal.

"The U.S. remains the place for AI growth; it leads in capital expenditure, and margins and corporate profits are strong," said Andreas Koenig, head of global FX at Amundi. "So that dynamic is still present, which is positive for the U.S. There is a favorable interest rate differential, and that supports the dollar."

The Bloomberg Dollar Spot Index has risen approximately 2% over the past two weeks—hitting its highest level since July—with options pricing pointing to further gains. This rally comes as robust U.S. economic data signals potential further Fed rate hikes following the first increase in three years, pushing Treasury yields to fresh multi-year highs. Meanwhile, the tech-heavy Nasdaq 100 climbed to a record high, and oil prices resumed their upward trend.

"We now see a risk that the dollar's strengthening will continue through the end of the year," said Alex Cohen, a strategist at Bank of America.

This marks a shift from the narrative that dominated the past two years, when global tariffs fueled calls for de-dollarization and US national debt soared toward $40 trillion—spurring the so-called "debasement trade," a move into gold or other assets as lax fiscal discipline eroded the value of currency and government bonds.

The dollar index has risen 1.6% since the start of September—following declines in July and August—just as Treasury yields across the curve approached or exceeded the 5% mark. Seasonality played a role: the final full week of September has historically been the dollar's strongest of the decade.

The rally occurred even after Finance Minister Scott Bessent ramped up bond purchases in recent months to curb borrowing costs, while simultaneously supporting measures to strengthen the Japanese currency. Both moves were interpreted as negative for the dollar. According to Daragh Maher, a senior currency strategist at HSBC, the "ambiguous relationship" between Treasury yields and the dollar will persist due to high US budget deficits, complicating the currency's outlook. Amundi’s Koenig agrees.

"We don't think the dollar is going to do anything spectacular," Maher said on Bloomberg TV on Thursday. "It will be a moderate strengthening of the dollar."

The Fed's hawkish shift caught many in the market off guard. Speculative traders, including asset managers and non-commercial players, had cut their bullish bets on the dollar ahead of the meeting, according to data from the Commodity Futures Trading Commission (CFTC).

Skeptics point to aggressive rate pricing, which sets a high bar for the Fed. Traders are pricing in nearly 90 basis points of hikes over the next 12 months. It will be difficult for the Fed to do more, which will limit the dollar's rally, says Nathan Thooft, a senior portfolio manager at Manulife Investment Management.

"If upcoming data on inflation, the labor market, or growth show signs of cooling, the Fed might have room to soften some of its hawkish rhetoric," Thooft said. "That could ultimately limit further gains for the dollar."

Other major economies may also struggle to raise rates significantly, as oil prices weigh on growth. Citigroup strategist Daniel Tobon said the ECB could reach a point "where negative side effects begin to emerge, potentially forcing a policy reversal," leaving the dollar in a stronger position relative to the euro. The market is pricing in at least one more ECB rate hike this year.

"In our view, the risk associated with incoming data is skewed in favor of the dollar rather than against it," said Tobon, who has held a recommendation to short the euro against the dollar since January.

The euro has fallen more than 3% against the dollar this year. Tobon estimates the dollar index could rise another 1%.

Other metrics also point to the US currency's resilience, although there are emerging signs that it may be due for a pause. In the options market, so-called risk reversals show that traders favor the dollar across all time horizons.

The Relative Strength Index (RSI) for the Bloomberg Dollar Spot Index—a measure of momentum—rose above 70 on Thursday for the first time since late June, signaling that the rally is becoming overheated.

Geopolitical risks are reinforcing this sentiment, reaffirming the dollar's status as a safe-haven asset, notes Maher.

"When the world seems to be falling apart again—as we saw last week—we all rush back to the dollar," he said. "So, the depreciation narrative is taking a back seat. Some fundamental truths of currency markets hold firm: the dollar is your safe haven."

Analysts are divided on how much longer the dollar rally will last. Some anticipate moderate strengthening through the end of the year, while others believe that high interest rate expectations are already capping upside potential. What does the chart show?

As of 10:23 Moscow time on September 25, the dollar index is trading at 101.20 (-0.08%).

A pause in the rally. The daily and 5-hour charts show a "strong buy" signal, with a robust upward trend. On the hourly chart, the index has slowed, but this appears to be a breather rather than a reversal. However, the daily RSI (70.9) is already at the overbought threshold. This aligns with the "overheating" signal reported by Bloomberg, making it risky to chase further gains.

Short-term levels (hourly chart)

* Resistance: 101.27, 101.30, and 101.33

* Support: 101.20, 101.18, and 101.14

* Key support on the daily chart: 100.80–100.83

Potential market movers for the dollar

* Today at 15:30 Moscow time: US durable goods orders. Forecast: -0.3% (previous: +1.1%). Weak data could weigh on the dollar.

* Today at 17:00 Moscow time: University of Michigan Consumer Sentiment Index (forecast: 47.8 vs. 51.7) and inflation expectations (forecast: 4.6% vs. 4.0%). Rising inflation expectations would support the dollar by reinforcing expectations of further Fed rate hikes.

* Key events next week: Core PCE index, US GDP (forecast: slowdown to 1.5% from 2.1%), and ADP employment data. The previous ADP report showed only 38,000 new jobs. If labor market weakness is confirmed, the Fed might have grounds to soften its hawkish stance, which would hurt the dollar. Scenarios

Bullish: Inflation expectations and core PCE come in above forecasts, reinforcing market expectations of further rate hikes. The index establishes itself above the 101.30–101.33 level and continues to rise.

Bearish: Weak data on orders, consumer sentiment, and GDP give the Fed room to adopt a more dovish tone. A break below 101.14 would open the way to the 100.80–100.83 range.

This material is for informational purposes only and does not constitute investment advice.