The dollar is flexing its muscles again. The broad-based dollar index has appreciated 3.1% this year, with the Advanced Foreign Economies Dollar Index up 3.8% and the Emerging Market Economies Dollar Index 2.5% stronger.

Higher bond yields, a response to disappointing inflation data, have strengthened the dollar. In the forecast, the Nominal Broad US Dollar Index slides from a second-quarter peak of 123.2 in 2023 to approximately 113 by 2028. To reflect the shift in US monetary policy expectations and the impact on expected interest rate differentials, we have lowered our near-term forecasts for some key currencies versus the US dollar, including the euro and yen.