Strategist makes ‘jaw-dropping' call — the dollar will rally, thanks to booming productivity

Standard Chartered's global forex strategist, Steve Englander, has issued a contrarian bullish call on the U.S. dollar, predicting a rally fueled by an anticipated rapid increase in U.S. productivity growth, potentially accelerating to a 4.5%-5% annualized rate in Q3. Englander posits that this productivity surge will drive higher corporate profitability, attract significant capital inflows, and elevate real interest rates, making dollar hedging less attractive for international investors and ultimately strengthening the currency, despite the dollar index's 9% year-to-date decline and acknowledged risks like government intervention.

Analysis

Strategist makes ‘jaw-dropping’ call — the dollar will rally, thanks to booming productivity Referenced Symbols A currency strategist is taking the contrarian view that the dollar will rise, on expectations of a rapid increase in productivity and profits growth. That’s the theory put forward by Standard Chartered Bank’s global forex strategist, Steve Englander, in his bullish and non-consensus recommendation on the dollar. He reckons his off-trend prediction will make “jaws drop.” He explains his views in a report in which he illustrates how dollar strength typically tracks productivity growth. The U.S. dollar index , which was steady on Thursday, has dropped 9% this year.He emphasizes that there are risks to his prediction, such as the present administration’s apparent determination to weaken the dollar, as well as acknowledging that without the productivity gains and the capital inflows, the dollar is at risk from mounting domestic and external debt. Englander contends, though, that over the last half-century, productivity growth has driven better profitability for corporate America and attracted capital inflows as a consequence. Englander points to “tentative indications of accelerating productivity growth,” calculating that it may be improving at 4.5% to 5% annualized rate in the third quarter, and demonstrates the correlation with profitability. He asserts that “real interest rates are expected to match the long-term marginal return to capital.” The more profitable investment opportunities there are, the higher the demand for capital, and the higher real rates would be. For international investors, these higher real interest rates make hedging the dollar less appealing when they buy U.S. assets. Discouraging overseas investors from hedging dollar-based exposure would be positive for the currency. Englander notes that Scott Bessent’s foremost responsibility as Treasury secretary is to keep borrowing rates low for the government, but if productivity takes off, as his note suggests, then artificially repressed rates could stoke overheating in the economy. Englander doubts that the U.S. can sustain low real rates, a weaker dollar and strong productivity growth. Inflation, or imports, or both, would surge. At this juncture, Englander is undecided on the question of whether AI is driving productivity growth or not. He’s inclined to believe it will and observes anecdotal evidence to that effect but detects no links with aggregate data thus far. Standard Chartered's global forex strategist, Steve Englander, has issued a non-consensus bullish call on the U.S. dollar, predicting a rally despite a 9% year-to-date decline in the dollar index. His thesis centers on an anticipated rapid increase in U.S. productivity growth, which he estimates could reach an annualized rate of 4.5% to 5% in Q3. This perspective challenges prevailing market sentiment and highlights a potential inflection point. Englander posits that this surge in productivity will drive enhanced corporate profitability, subsequently attracting significant capital inflows to the U.S. economy. This influx, coupled with higher demand for capital, is expected to elevate real interest rates, making dollar hedging less appealing for international investors holding U.S. assets. Such a scenario would inherently strengthen the dollar by increasing unhedged demand. Acknowledged risks include the current administration's stated aim to weaken the dollar and the potential for artificially repressed rates to stoke overheating if productivity takes off. While Englander sees tentative signs of accelerating productivity, he remains undecided on AI's current aggregate impact, noting anecdotal evidence but a lack of statistical correlation thus far. The long-term sustainability of low real rates alongside strong productivity and a weaker dollar is also questioned.

Key Decisions for Investors

• Investors should closely monitor upcoming U.S. productivity and corporate profitability data, as these are critical indicators for Englander's bullish dollar thesis.
• Evaluate potential shifts in real interest rate differentials, as sustained increases could significantly alter international capital flow dynamics and currency hedging incentives.
• Consider tactical long positions in the U.S. dollar or reassess currency hedging strategies for U.S. asset exposures, particularly if productivity gains become more evident and durable.
• Watch for any policy signaling from the administration regarding dollar strength, as political intervention remains a key risk to this contrarian outlook.