US dollar reverses course after climbing for 2 months

The US dollar maintained a strong position at the 100 threshold during the first half of the year amid Washington’s tariff measures and Middle East tensions.

The US Dollar Index measures the value of the greenback against the euro and other foreign currencies.

Geopolitical risks in the Middle East, Kevin Warsh’s taking office as Fed chair, and regional tensions reinforced the dollar’s safe-haven feature, contributing to its performance against other currencies.

The US dollar fell 1.5% to 99.7 as expectations that the Fed would not take sufficiently strong actions in combating inflation came to the fore, marking its first monthly decline in two months.

The currency fell below the 100 threshold for the first time since June 17, as the index had grown 0.8% in May and 2.3% in June, after falling 1.6% in April.

As Fed rate cut expectations waned, the US dollar’s potential for a downwards move was limited.

Jane Foley, senior foreign exchange strategist at Rabobank, told Anadolu that the Fed’s commitment to fighting inflation under chair Kevin Warsh came into question, following the recent meeting.

Foley stated that expectations over the Fed’s monetary policy shifted, with general consensus pointing to further rate hikes over a six-month horizon.

“This is in contrast with the consensus view into the spring, which saw risk of Fed rate cuts this year,” she said. “The turnaround in Fed policy expectations this spring, coupled with safe haven demand continue to underpin the value of the USD and limit downside potential.”

Piotr Matys, senior foreign exchange analyst at In Touch Capital Markets, told Anadolu that Warsh’s reluctance to commit to rate hikes in advance and his remarks at the press conference “left many confused, and even stunned,” which undermined the bank’s credibility and drove down the value of the US dollar.

“By assuming that the markets will do the heavy lifting for him in bringing inflation sustainably in line with the official target, Warsh could be playing a very risky game that could end up with yields on US Treasuries getting out of control if volatility rises significantly and with his credibility low, he could find it difficult to regain control over the narrative,” he said.

Matys noted that Warsh could mitigate this risk by supporting a rate hike in September.

“It’s important to stress that central bank credibility is an important pillar of support for any currency, especially when it comes to a major reserve currency such as the dollar,” he added.