USD Policy Risks Cap Recovery – DBS: Why the U.S. Dollar’s Comeback Is Slower Than Expected

In recent market analysis, DBS Group Research highlighted an important trend in global finance: despite positive economic data in the United States, the U.S. dollar (USD) has struggled to regain strength. This observation has profound implications for investors, global traders, and policymakers alike.

Why the USD Isn’t Bouncing Back Strongly

One of the central themes in the DBS report is that the anticipated rebound in the U.S. dollar has been limited by policy uncertainty and political influences. Although U.S. labor market data showed stronger-than-expected job growth and a lower unemployment rate, the dollar didn’t react as strongly as many had projected.

This unusual disconnect has raised concerns about several key factors:

• Federal Reserve policy decisions are becoming increasingly unpredictable. DBS economists point out that officials may prefer keeping interest rates steady rather than cutting them further, particularly as inflation remains above target.

• Federal Reserve independence is under scrutiny, especially given political pressures from Washington. Markets are sensitive to the idea that central banks might be influenced by short‑term political goals rather than long‑term economic stability.

• Fiscal challenges, including a growing national debt and widening budget deficits, create long‑term pressure on the currency’s value.

• De‑dollarisation trends — where some countries reduce reliance on U.S. Treasuries and diversify reserves — may also dampen demand for the greenback.

Together, these forces explain why the USD’s recovery phase has been more fragile and uneven than expected.

What This Means for Global Markets

The implications extend far beyond exchange rates. The strength of the U.S. dollar influences everything from commodity prices to emerging markets, as well as the performance of the world’s most traded currency pairs like EUR/USD and USD/JPY.

Here are several key takeaways:

📌 Investor Sentiment Is Soft

Investors typically seek clarity in monetary policy. When there is uncertainty — especially over interest rate trajectory and central bank independence — risk assets may attract more attention than the traditional safe haven offered by the USD.

📌 Global Trade Dynamics Are Shifting

A less dominant dollar can make U.S. exports more competitive but can also increase volatility in foreign exchange markets. Emerging markets that hold USD‑denominated debt may face different risks and opportunities based on currency moves.

📌 Currency Traders Are Repricing Risk

Currencies are rarely driven by a single factor. The combination of domestic U.S. policy uncertainty, political influence, and global diversification is causing traders to rethink their positions, especially in major pairs like EUR/USD and USD/CAD.

Looking Ahead

Despite these headwinds, it’s too early to dismiss the dollar’s role in global finance. The U.S. economy remains one of the largest and most dynamic in the world. However, DBS Group’s analysis makes it clear that policymakers and investors should not expect a swift return to dollar dominance without significant changes in fiscal strategy and stronger confidence in monetary independence.

As global markets continue to navigate the balance between growth, inflation, and geopolitical pressures, understanding the drivers behind the USD’s performance will be crucial for anyone involved in financial markets — from individual investors to institutional strategists.