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The dollar has steadied after the worst start to the year since 1973, as the resilience of the US economy prompts some investors to back away from bearish bets on the currency.
The dollar index — a gauge of the currency’s strength against major rivals — tumbled in the first half of the year as concerns that Donald Trump’s trade war would hurt growth combined with jitters over rapidly mounting sovereign debt.
But it has risen 1.6 per cent so far this month — putting it on course for its first monthly gain of 2025 — as a run of strong economic data casts doubt on the case for further interest rate cuts from the US Federal Reserve. The dollar has clung on to those gains despite a brief slump following reports that the president was considering sacking Fed chair Jay Powell.
“The US economy and labour market are holding up better than feared, allowing the Fed to keep rates on hold despite criticism from the Trump administration,” said Lee Hardman, senior currency analyst at MUFG.
Recent figures showed the US economy added 147,000 jobs last month, an unexpectedly robust figure that suggests the labour market is shrugging off the effect of Trump’s tariffs. June’s annual inflation rate also topped expectations at 2.7 per cent, giving further ammunition to Fed policymakers who want to see further evidence of the impact of import levies on prices before lowering borrowing costs.
Traders in futures markets now expect just one or two further quarter-point rate cuts by the end of this year, rather than the two or three that they were expecting at the start of the month.
“The Fed will not be in a rush to resume easing” given the recent economic evidence on the health of the economy, said analysts at Brown Brothers Harriman.
Many of the risks that drove the dollar to its worst start to the year since 1973 are still there, investors say. Trump’s attacks on Fed independence could undermine the currency if they escalate further, while steep tariffs on many US trading partners are set to come in to force in early August unless the White House can hammer out a series of trade deals.
But even dollar bears say a period of consolidation was due after the currency’s sharp drop. “We are bearish [on the dollar] over the medium-term but risk of a summer rally has risen,” said Bank of America analysts.
Others see the ingredients of a more significant recovery. Flavio Figueiredo, global head of foreign exchange at Citi, said markets will start to focus more on economic growth — helped by US tax cuts and other policies — as the “fog of uncertainty” created by the trade war lifts in the coming months.
“All of that will drive growth in the US,” he added. “I think that is going to be positive for the dollar.”
Meanwhile, some of the optimism that powered the euro above $1.18 against the dollar earlier this year has ebbed from markets. Comments by European Central Bank officials warning over the strength of the euro have encouraged it to weaken, analysts say, while Trump’s threat of 30 per cent tariffs on the EU has weighed on confidence.
According to derivatives exchange CME Group, the volumes of so-called put options in the euro — bets on a decline in its value against the dollar — have overtaken so-called call options so far this month. Between March and June, investors bought more heavily into call options on the single currency, a bet on it strengthening.
“There was probably some excitement about [the euro] getting to $1.20 on the view that some moderate data deterioration was enough to go all in on the dovish Fed call,” said Francesco Pesole, an FX strategist at ING. “But the data have [since] simply gone in the opposite direction.”