BMO Capital Markets recommends staying long on the dollar as foreign-exchange traders underestimate the persistent effects of higher rates and inflation. Mark McCormick, the firm's chief FX strategist, argues that even if oil prices retreat after geopolitical tensions ease, inflation will linger and keep central banks hiking rates, supporting the US currency.

The Bloomberg Dollar Spot Index rose about 2% since late February, outpacing declines in the euro, pound, and yen. Strong US economic data and a surprise burst of job growth have fully priced in a Federal Reserve rate hike by year-end, pushing two-year yields to their biggest one-day jump since April. BMO favors the dollar against the euro, pound, yen, Australian and Canadian dollars.

Global inflation is accelerating, with euro-area prices topping 3% for the first time in 2023. US consumer prices are set to rise 4.2% in May, up from 3.8%. McCormick says the focus should be on the evolving regime of higher rates and slower growth rather than short-term headlines. The dollar's outperformance reflects the resilience of US assets in a globally reflationary environment.