BNP Paribas Expects Dollar Strength in Near Term before Gradual Decline as Geopolitical Risks Ease

The U.S. dollar is expected to maintain its recent strength in the near term, supported by the resilience of the American economy and persistent inflationary pressures, but its dominance could gradually weaken as geopolitical tensions ease and fiscal challenges in the United States become more prominent, according to BNP Paribas.

In a recent research report obtained by Al Mal, the French banking group said global currency markets are entering a new phase marked by diverging performances between developed and emerging-market currencies, driven by differences in monetary policy paths, economic conditions, and geopolitical developments.

BNP Paribas highlighted growing differences among major central banks, forecasting that the U.S. Federal Reserve could deliver one additional interest-rate increase in December, following the midterm elections, as labor market conditions remain gradually tight.

The bank expects the European Central Bank to maintain a wait-and-see approach without introducing further rate changes in the near term.

Meanwhile, BNP Paribas anticipates that the Bank of England will raise interest rates once during the current year, with the move expected in September.

The bank said the dollar continues to benefit from several factors, including the strength of U.S. equity markets, elevated inflation levels, and the Federal Reserve’s continued inclination toward tighter monetary policy.

However, BNP Paribas expects global capital flows to gradually shift away from the U.S. currency as geopolitical pressures diminish, potentially reducing the dollar’s appeal over the medium term.

The report identified widening U.S. fiscal deficits and rising government debt levels, driven by increased defense spending and pre-election stimulus measures, as key long-term risks that could weigh on the dollar.

Based on these expectations, BNP Paribas forecasts the euro will rise to $1.14 within the next three months, followed by a further increase to $1.20 over the coming 12 months.

The bank said the outlook reflects a gradual normalization in global markets, where currency movements are expected to be shaped increasingly by economic fundamentals and fiscal sustainability rather than solely by geopolitical uncertainty.