A stablecoin boom will force a return to dollar dominance - but not just yet, this strategist says

By Jules Rimmer

The introduction of stablecoins could be a driver for increased U.S. Treasury

Michael Kelly, global head of multi-asset at PineBridge Investments, hit the headlines recently when in an interview with Bloomberg he advocated a bullish position on the dollar, partly informed by the huge potential demand created by stablecoins .

Kelly was keen to address the story: "The view is more nuanced than that." The key lies in PineBridge's preference for an intermediate timeframe when it is investing. PineBridge, a global asset manager running $200 billion of capital, likes to look forward 18 months or so when expressing a view.

In fact, in the near term Kelly noted, "We think trading in the dollar will be choppy actually." He is skeptical about an exodus of international capital from the U.S. and believes the 12% decline in the dollar this year, "probably owes more to Taiwanese life insurers changing their hedging ratios than anything else."

Kelly thinks the dollar is likely to start showing more strength towards the second half of 2026. "We expect a reversion to U.S. centricity when the Fed's rate cutting cycle nears its conclusion and some of the potential benefits from the Trump administration's reforms in economic and trade policy may be reaching fruition."

Noting S&P Global's reaffirmation of America's AA+ long-term credit rating Tuesday, Kelly strikes a cautiously positive tone throughout, when discussing the prospects for U.S. risk assets.

Kelly makes it clear he's no fan of tariffs: "Let's be clear: they are a tax, just not the kind of tax many people wanted." He does think, though, their revenue-generating potential has been underplayed. He points out tariff collections so far are annualizing at $325 billion this year and could be $450 billion in 2026, even before any higher tariffs are announced or introduced. He reckons economists have overlooked their potential impact on the deficit.

U.S. tariff revenue collection has surprised to the upside

He calculates tariffs could reduce one percentage point from the consensus of a deficit at 6.5% of GDP and he suggests that going forward, tariff receipts will force the deficit trend downwards. Moreover, he thinks the average 1.8% GDP growth forecast by Wall Street economists in the next couple of years is likely to prove conservative.

Treasury Secretary Scott Bessent echoed these optimistic forecasts on Tuesday and said he expected to revise upwards his tariff receipt forecasts.

This clearly would be supportive of the dollar. Given recent speculation about the independence of the Fed with intense pressure on Chair Powell to reduce interest rates (and resign while he's at it), the dollar may need all the support it can get.

Characteristically, Kelly takes a measured approach to the very public spat between the executive branch and the central bank. Having operated in New York for several decades, Kelly is long familiar with the president's modus operandi. and believes maximalist demands usually result in more moderate outcomes and this one will be no different. He doesn't foresee any drastic action and so worst-case scenarios should probably be discounted.

More supportive of the dollar still, is the impact PineBridge expects from the introduction of stablecoins. Kelly views the GENIUS Act legislation, recently signed into law, will be tremendously positive for stablecoins by creating a regulatory framework and addressing issues like security, backing, redemption, disclosure and custody.

Ultimately, Kelly expects one stablecoin from among the many currently being mooted, to emerge as the most liquid and reliable and for this innovation to create demand for U.S. Treasurys and the dollar. He thinks this will prompt a redollarizing of central bank reserves, reversing the recent trend. Asked where the demand for stablecoins will come from, Kelly imagines they will take market share from cash and from municipal bonds.

Turning to the stock market SPX , Kelly agrees "it's sending a message that stagflation is coming, but it's not secular stagflation, it's transitory." And again, using his intermediate investment timeframe, he's expecting things to improve by the second half of 2026. By then, he bets, AI will be delivering on the productivity and efficiency gains the industry is promising right now. He is unequivocal: " AI is a revolutionary technology that will change the world, a new tool to superpower economies."

For the time being, Kelly is well-disposed towards the "pickaxe and shovel" AI plays, the GPU (graphics processing units) producers and data centers but the next stage of the investment cycle, he believes, will be those "data-rich" industries like financials and pharmaceuticals who benefit.

Interestingly, Kelly thinks some of the impact of AI is already showing up in labor-market job losses but this is being compensated for by the immigration decline. This may well end being a positive, he remarks because "the tighter the labor market, the less society will fight the implementation of AI."

-Jules Rimmer

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