Currency strategists said rising fiscal risks, weaker economic data and uncertainty over Federal Reserve policy could put more pressure on the dollar despite its recent strength.
Rising U.S. Treasury yields helped support the dollar in 2026 by attracting capital inflows into dollar assets.
of us dollar index Track the dollar’s performance against six of the world’s major currencies, including the euro, pound, Swiss franc, Japanese yen, and Canadian dollar. The index has increased 1.15% since the beginning of the year, hitting a 52-week high of 101.80 on June 24th. The index hit 99.4 as of 5:32 a.m. ET Wednesday.
Charl Chanana, chief investment strategist at Saxo, said rising U.S. bond yields would not necessarily support the dollar if they believe they reflect fiscal risks, increased government borrowing and persistent inflation rather than the strength of U.S. growth or the Federal Reserve’s tightening policy.
Chanana added that while the historical relationship between U.S. bond yields and a strong dollar “remains important,” “investors should increasingly be asking why U.S. yields are rising.”
“A higher yield driven by stronger economic fundamentals is not necessarily the same as a higher yield driven by a larger risk premium. This distinction may help explain why the recent rise in U.S. Treasury yields has coexisted with a less convincing dollar strength.”
30 Year Treasury of the United States.
Global bonds sold off this week, along with the US. 30 year government bond yield Chanana said a breakdown in the relationship could have far-reaching implications for the portfolio.
“For international investors, U.S. assets have long benefited from both high underlying returns and a strong dollar. As this relationship fades, geographic diversification may become more important.”
Weak US economic data weighs on dollar strength
Weaker U.S. consumption, inflation and employment data are causing investors to reassess interest rate expectations and reduce some of their bullish dollar positions, according to Société Générale.
Kit Jaks, chief currency strategist at SocGen, said the U.S. economy has shown resilience since the outbreak of the Middle East conflict, and the Fed’s interest rate settings are supporting the dollar.
Jaques said in a note that recent inflation and employment weakness have dampened market expectations for U.S. interest rate hikes.
“Long dollar positions are now being trimmed in a thin summer market as the fundamental rationale for holding long dollar positions has diminished,” he said, adding that this could potentially push the dollar index lower or keep it in the “lackluster” $95-$100 range for the rest of the year.
Mixed Fed signals create new risks
George Saravelos, global head of currency research at Deutsche Bank, said uncertainty about the Fed’s ability to respond to inflation could be a further drag on the dollar.
He highlighted “mixed signals” from Federal Reserve Chairman Kevin Warsh on the central bank’s inflation target and toolkit, adding that he believes this ambiguity will ultimately be negative for the dollar.
“We are not on the dollar appreciation train this year as global economic growth remains resilient, geopolitical developments continue to challenge the dollar’s dominance, and there is ambiguity about the Fed’s ability to respond to inflation,” Saravelos said.
USD.
In a memo on the recent historic U.S.-Japan intervention to support the yen, Saraveros argued that the Fed’s “FIMA” program would ultimately have the same economic effects as quantitative easing.
The Fed’s FIMA repo facility allows authorized foreign central banks and other monetary authorities to temporarily exchange U.S. Treasuries for dollars.
“When foreign governments post their bonds as collateral for cash, the Fed prints dollars,” Saravelos said. “If the Fed significantly increases the size of the FIMA facility as requested by the U.S. government, we would view it as an indirect way for the Fed to provide financial financing to the UST, resulting in further dollar negative activity.”
Why a decline in US stocks does not have a negative impact on the dollar
Meanwhile, BBH vice president, head of global market strategy, foreign exchange Elias Haddad said the stock market correction could reduce dollar risk, adding that foreign investors would not completely abandon dollar assets.
Foreigners bought $920 billion in U.S. stocks in the 12 months ending in June, more than triple the $294 billion in U.S. Treasuries, according to a BBH analysis of Treasury data.
“Some have argued that this leaves the dollar increasingly vulnerable to stock market corrections as foreign investors exit their US stock holdings. We disagree,” Haddad said in a note Tuesday. He said the broader stock market decline could instead prompt foreign investors to return to safe-haven U.S. Treasuries, which still underpins the dollar’s defensive appeal.
