What will flip the US Dollar's trajectory as inflation cools toward the Fed's 2% target in 2027?

The headline poses a forward-looking question rather than reporting a completed event: what could alter the US dollar's direction as inflation moves toward the Federal Reserve's 2% target in 2027. The core transmission mechanism is the interest rate differential, since a slowing inflation path typically reduces the probability of restrictive policy persisting, which narrows the yield advantage that has supported dollar demand. Because the dollar's value is driven by relative policy expectations, its exposure runs through short-dated Treasury yields and fed funds futures, along with the currency pairs that reference the greenback, such as EUR/USD, USD/JPY and USD/CNH. A second channel to monitor is capital flows, as any shift in foreign demand for US assets could offset or amplify the effect of lower rate expectations. Traders should watch the monthly Personal Consumption Expenditures price index and the Fed's quarterly Summary of Economic Projections, since revisions to the projected inflation and policy-rate path would directly reprice the dollar's rate-differential outlook.

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