An Unusual U.S. Dollar Cycle: Characteristics, Mechanism, and Outlook

Abstract: The current U.S. dollar cycle exhibits unprecedented characteristics, with resilience far exceeding historical experience. In this cycle, the dollar exhibits three unusual behaviors: divergence from its reserve currency share, divergence from fiscal and trade deficit expansion, and divergence from high inflation in the United States. The formation of the dollar cycle is based on fundamental, policy, and capital mechanisms, with significant influence from geopolitical factors. Positive feedback between the real economy and financial sectors makes the dollar cycle prone to "overshooting." Whether the dollar can stabilize in the future and whether it has reached a major turning point depend critically on the economic market performance of the United States relative to other countries and its own error-correction mechanisms.