Why BBH Expects US Dollar Index to Break Higher

BBH's Conviction on Dollar Overshoot

Brown Brothers Harriman strategists expect the US Dollar Index to overshoot its recent trading range. The call is not tied to a single catalyst. The implication is that the dollar's current range-bound phase is resolving upward, and the risk tilts to the long side. A range overshoot typically delivers a move larger than the prior volatility band once a trigger fires.

A naive reading treats this as a simple bullish call on the greenback. The better market read focuses on mechanism and positioning. An overshoot requires a trigger that forces stop-losses or draws in momentum flow. For the dollar, the most plausible triggers are a hawkish repricing of Federal Reserve rate expectations, a sudden deterioration in risk appetite that fuels safe-haven demand, or a decisive break in yield differentials favoring dollar-denominated assets.

Transmission Through Yields and Risk Appetite

If the DXY does overshoot, the transmission chain is predictable. Higher US Treasury yields would compress carry in emerging-market currencies and force a repricing of high-beta pairs like the Australian dollar, New Zealand dollar, and Mexican peso. The Japanese yen would initially weaken on the rate differential. If risk-off accompanies the dollar bid, the yen could eventually benefit as a funding unwind accelerates.

Commodity prices face a headwind from a stronger dollar, all else equal. Gold tends to weaken on dollar strength. The relationship breaks down in stagflation or severe risk aversion. Crude oil is more sensitive to aggregate demand expectations than to the dollar index alone. The transmission is weaker there.