Trump welcomed the “best dollar month” since taking office, and the strong dollar paradigm returns for a limited time?

The Zhitong Finance App learned that with the resilient GDP growth rate of the world's largest economy, the Trump administration's signing of trade agreements with several trading partners, and expectations of the Federal Reserve's interest rate cut due to Powell's release of hawkish signals and the unexpected heating of core PCE, the US dollar is about to usher in its best month of performance since 2025. The current rebound of the US dollar also marks a major reversal in the historic weak trend so far this year, and several recent economic data, trade negotiations led by Trump, and options market bets show that the US dollar may usher in a period of rebound in the second half of the year, but the long-term sentiment of the market still tends to be bearish.

Statistics show that as of early trading in US time, the Bloomberg Dollar Spot Index rose 2.5% in July, the only month since President Donald Trump was officially sworn in in January this year. Although Federal Reserve officials said that economic growth is slowing, data released this week showed that the US economy expanded at a rate of 3% in the second quarter. This figure is quite stable in the context of changing trade policies. Interest rate cuts are expected due to Federal Reserve Chairman Powell's statement that the current interest rate level is appropriate when tariffs and inflation are still uncertain, and the core PCE price index rose 2.8% year on year in June, higher than the forecast of 2.7%, the highest level since February.

Federal Reserve Chairman Powell hinted at a press conference after Wednesday EST that the benchmark interest rate may remain high for a longer period of time, which will help push the dollar index higher and narrow the year-round decline to 7%. After five consecutive days of gains, the US dollar index remained stable on Thursday.

“After a period of obvious weakness, we saw some buying in the US dollar due to resilient US economic data, progress in tariff negotiations, and the exhaustion of bear power.” Nathan Tuft, senior management portfolio manager from Manulife Investments, said.

The US dollar is expected to have its best month so far this year — the US currency rebounds after six consecutive months of decline

The interest rate swap market currently shows that the probability that the Fed will cut interest rates in September is only 40%, while the probability of cutting interest rates in October is about 80% — and before Powell's speech on Wednesday, successive interest rate cuts in September and October were almost seen as a foregone conclusion.

Even if only for a short time, the current rebound in the US dollar marks a major reversal in the historic weak trend so far this year. The trade war initiated by Trump and the drastic economic turmoil caused by repeated policy turns, plus tax cuts that could drastically widen the US budget deficit, have drastically weakened the dollar's status as a global reserve currency and caused the “American exception theory” to gradually collapse.

Bloomberg Strategist Views

“The dollar is expected to strengthen further in the coming weeks. Resilient US economic data, the Fed's unprepared to cut interest rates, and the imminent implementation of a new wave of trade agreements are all supporting a stronger dollar.” Strategist Noel Ali from Bloomberg Strategists said.

The next non-farm payrolls report to be released on Friday will provide investors with another important reading of the state of the US economy. Federal Reserve Chairman Powell also pointed out that several economic reports, including employment and inflation data for the next two months, may change their interest rate path considerations before the September interest rate meeting.

The US stock market, which has repeatedly reached record highs, also supports the US dollar exchange rate. The S&P 500 index is on its way to rising for three consecutive months, attracting capital from investors around the world. Furthermore, the strong profits of tech giants highlight America's absolute dominance in the AI competition, increasingly attracting global capital to the US stock market.

Although there were concerns that international investors would keep abandoning their US assets during the sell-off, the latest data shows that this did not actually happen. US Treasury bonds held by overseas investors increased in May, while the share of the US dollar in foreign exchange reserves held by global monetary authorities remained stable in the first quarter of 2025.

“If we want to continue shorting the dollar against a basket of currencies, we need a major surprise from Trump or a significant slowdown in the US economy.” Macro Hive forex strategist Ben Ford said.

Another factor boosting the dollar against large sovereign currencies such as the euro and yen is that Trump has negotiated a number of trade agreements that are more beneficial to the US economy. The euro fell nearly 3% against the US dollar this month, and German industry leaders warned that tariffs would weaken Europe's market competitiveness.

“No matter how the details are broken down, these trade agreements seem like an awkward negotiation in Europe.” Brent Donnelly, president and veteran forex trader from Spectra Markets, said. “It reinforces the US-dominated trade paradigm.”

In July, the yen and the British pound were the worst performing currencies against the US dollar in the G10, and both depreciated by more than 3.5%. The Canadian dollar saw the smallest decline.

Looking ahead to the next few months, options show that traders generally expect the dollar to rise moderately. This is in stark contrast to May and June when they were betting that the dollar would continue to depreciate.