Standard Chartered poses a question bordering on the philosophical: Is the United States heading toward a new era of productivity-driven growth, similar to 1997 when the dollar flourished amid tech optimism? Or will it follow the pattern of 2007, when that optimism turned out to be a harbinger of the financial crisis?
For now, the bank leans toward optimism. Analysts foresee a scenario in which rising productivity and corporate earnings once again turn the dollar into a magnet for global capital. However, they caution that markets may be underestimating the risks.
“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 said in a recent note.
Preliminary data suggests a rebound in US productivity, occasionally even pointing a structural shift. Still, analysts are quick to remind investors that economic history is filled with such so-called "shifts," most of which ultimately proved to be cyclical.
Corporate earnings tend to move in tandem with productivity. Equities rise when the economy runs hot and retreat when momentum slows. This appears orderly on a chart, but less so in real life.
The central variable remains capital flows. If productivity and earnings growth continue, real yields for investors may become as rare and irresistible as the Northern Lights. That would help support the dollar and explain why its exceptionalism can still be taken seriously.
However, the report also offers a sobering warning: without sustained productivity gains and stable capital inflows, the dollar will have to face its unfavorable fundamentals. These include growing internal and external debt loads that are expanding faster than policymakers would like.
Of course, artificial intelligence is a wildcard in the outlook. In a positive scenario, AI is expected to become the next engine of productivity. Standard Chartered acknowledges the potential but urges caution. For now, there is scant empirical evidence that AI meaningfully accelerates economic output rather than merely amplifying noise.
“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,” analysts noted.
In the end, the dollar stands at a crossroads between two eras: one defined by technological optimism and resilient growth; the other by overvalued assets and mounting debt fatigue. For now, markets are betting on the former. However, history has shown that dollar exceptionalism can stem from either triumph or miscalculation.
