BMO Capital Markets calls the US dollar the best bet among major currencies as a new era of higher-for-longer global interest rates unfolds, with the greenback set to attract capital flows and dominate forex markets.
BMO strategists explicitly name the dollar as the best bet, citing a new global regime of high interest rates that will widen rate differentials in the greenback's favor.
BMO's call suggests DXY could rally further as higher US rates attract capital flows, widening the yield advantage over other majors and supporting a sustained uptrend.
The end of the low-rate era and persistent inflation globally forces central banks to keep rates elevated, widening rate differentials that favor the US dollar over peers.
The call is based on a structural shift in the rate regime, suggesting a durable multi-year trend, though short-term pullbacks may occur on data surprises.
A bullish dollar call under a high-rate regime implies weakness in EUR/USD as the euro lacks the interest rate support of the greenback, with the ECB unlikely to match Fed tightening.
The euro would depreciate as the dollar benefits from higher US interest rates, making dollar-denominated assets more attractive relative to euro-denominated ones and pressuring the pair lower.
A more aggressive tightening cycle from the ECB or a sudden shift in US monetary policy toward easing could narrow rate gaps and revive the euro.
BMO's view that high rates are the new normal signals pain for long-duration bonds, as rising yields erode the value of TLT's holdings of long-term Treasury bonds.
TLT, which holds long-term Treasury bonds, would decline in value as yields rise. The new regime of higher rates makes existing low-yielding bonds less attractive, pressuring prices.
Short-term, TLT could face pressure as yields adjust higher, but long-term investors might see entry points if yields spike too far above the eventual equilibrium.
BMO strategists see the US dollar outperforming peers as global central banks keep rates elevated, breaking from a decade of low-rate policy. The firm’s bullish dollar call hinges on sticky inflation forcing the Fed to maintain restrictive policy, widening yield differentials. The view challenges consensus expectations of dollar weakness and signals a structural shift in currency markets.
BMO believes the US dollar is the best bet among major currencies as global interest rates remain high. The firm argues that the era of ultra-low rates is over, and higher rates will widen yield differentials in the dollar's favor.
Sticky inflation and central banks' commitment to taming price pressures mean rates will stay elevated longer than markets expect, ending the low-rate environment of the 2010s and ushering in a new era of tighter monetary policy.
Currencies with low-yielding central banks like the euro and yen, as well as risk-sensitive currencies, could underperform relative to the dollar as rate gaps widen.