Is the USD in 1997 or 2007?

Investing.com -- The dollar’s fate hinges on whether the U.S. is heading for another 1997-style productivity boom or repeating the imbalances seen before 2007. Standard Chartered is leaning bullish, betting that rapid productivity and profit growth can sustain USD exceptionalism, though the bank warns the risks are far higher than most expect.

“We see a path by which USD exceptionalism can be maintained through rapid productivity and profits growth, and consequent strong capital inflows. A number of factors would need to come together, but we believe the risks are much higher than what the market is currently expecting and pricing,” Standard Chartered analysts said in a recent note.

Tentative evidence now points to “accelerating US productivity growth,” with recent gains strong enough to hint at a secular shift. But Standard Chartered highlights that most periods of sharp productivity gains are cyclical, making this latest bounce difficult to gauge as a lasting trend. The analysts also underline profits growth closely following productivity, a “broad correlation for periods of strong productivity growth to be seen as periods of strong equity market performance.”

Capital flows, however, remain key. If the productivity, profits and capital inflow pathway holds, “real returns will be a magnet for fixed income investors,” offering continued support for the greenback. However, the report warns that absent robust productivity and inflows, the dollar “is at risk from rising domestic and external debt.”

While AI could be a game-changer for U.S. competitiveness, Standard Chartered cautions that aggregate data still lacks clear evidence for an AI-driven productivity surge. “We lean towards the possibility that AI could drive faster aggregate productivity growth, but we have not so far found a way to show this empirically,” the analysts said.

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