Investing.com — Despite recent weakness, analysts at BCA Research said in a note on Monday that the index remains resilient and is expected to rebound in the coming months.

The global economic situation, characterized by a decline in production and growing caution in financial markets, creates conditions for a dollar recovery.

The dollar may be losing value, but it is far from out of the game, according to BCA Research.

Global financial markets saw the US dollar decline in 2024 as the broader economic environment was weighed down by uncertainty.

Global production, which briefly stabilized at the beginning of the year, has entered a up-to-date recession. This relapse is accompanied by weakness in oil and prices, key indicators of global economic activity.

Moreover, various segments of global risk assets failed to break through their previous highs, pointing to deteriorating global growth conditions.

In addition, liquidity conditions are tightening. BCA Research notes that global dollar liquidity, defined as the sum of the U.S. monetary base and securities held by the Federal Reserve for foreign officials and international accounts, is dwindling.

This factor has contributed to the current decline in dollar strength. However, the same lively of reduced liquidity could ultimately prove to be a boon for the dollar.

“It is worth noting that tightening global US dollar liquidity – calculated as the sum of US monetary base and securities held at the Federal Reserve for foreign officials and in international accounts – is typically positive for the US dollar,” the analysts said.

This tightening is linked to global manufacturing, which is closely correlated with the dollar. When the global economy contracts, the U.S. dollar often behaves countercyclically, rising in value when risk assets suffer losses.

The current situation is somewhat reminiscent of the bear market of the early 2000s. In the first phase of the bear market of 2000-2002, the US dollar appreciated as global stock markets, including emerging market (EM) stocks, sold off.

If this pattern repeats itself, the dollar could follow a similar trajectory in the coming months, gaining strength in the early stages of a bear market.

One of the main reasons BCA Research continues to have a positive view of the US dollar is the structure of the global financial system.

The US dollar remains the dominant global reserve currency, and most international transactions are settled in dollars.

Moreover, in times of economic stress, investors often seek safety in U.S. assets, which further supports the dollar.

“The broad trade-weighted US dollar has so far failed to break through the lower bound of its ascending channel,” analysts said.

The currency continues to benefit from its safe-haven role, which should sustain demand, especially given the ongoing global economic uncertainty.

Emerging market stocks and currencies are strongly correlated with global growth. BCA indicates that a renewed recession in global manufacturing will likely lead to declines in emerging market stocks and currencies.

A stronger US dollar could intensify these pressures by making it more pricey for emerging markets to service their dollar-denominated debt, further limiting their growth prospects.