Has Trump's "best dollar month" since taking office brought back the strong dollar paradigm temporarily?

According to the Zhitong Finance APP, as the GDP growth of the world's largest economy remains resilient, the Trump administration signs trade agreements with multiple trading partners, and the Federal Reserve's interest rate cut expectations rise due to Powell's hawkish signals and unexpected increases in core PCE, the US dollar is set to have its best month since 2025. This rebound of the dollar also marks a significant reversal in this historically weak trend so far this year, and recent economic data, Trump-led trade negotiations, and bets in the options market indicate that the dollar may experience a rebound in the second half of the year, although market sentiment remains bearish in the long term.

Statistics show that as of early trading in the US, the Bloomberg Dollar Spot Index rose 2.5% in July, marking the only month of gains since President Donald Trump was officially inaugurated in January this year. Although Federal Reserve officials have stated that economic growth is slowing, data released this week showed that the US economy expanded at an unexpected rate of 3% in the second quarter, which is quite robust against the backdrop of changing trade policies. The expectations for interest rate cuts have been influenced by Fed Chairman Powell's statement that the current interest rate level is appropriate given the uncertainties surrounding tariffs and inflation, and the core PCE price index rose 2.8% year-on-year in June, exceeding the expected 2.7%, reaching the highest level since February.

Fed Chairman Powell hinted at a news conference after Wednesday's session that the benchmark interest rate may remain elevated for a longer period, which helped push the dollar index higher and narrowed its decline for the year to 7%. After five consecutive days of gains, the dollar index remained stable on Thursday.

"After experiencing a noticeable period of weakness, we are seeing some buying in the dollar due to the resilience of US economic data, progress in tariff negotiations, and the exhaustion of short positions," said Nathan Tuft, Senior Portfolio Manager at Manulife Investment.

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

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

Even if only temporary, this rebound of the dollar marks a significant reversal in this historically weak trend so far this year. The trade war initiated by Trump and the severe economic turmoil caused by frequent policy shifts, along with tax cuts that could significantly widen the US budget deficit, have greatly weakened the dollar's status as the global reserve currency and gradually eroded the notion of "American exceptionalism."

Bloomberg Strategist's View

"In the coming weeks, the dollar is expected to strengthen further. The resilience of US economic data, the Fed's unwillingness to cut rates, and a wave of new trade agreements about to be finalized are all supporting a stronger dollar," said Noel Ali, a strategist from Bloomberg Strategist The next non-farm payroll report, set to be released on Friday, will provide investors with another important reading on the state of the U.S. economy. Federal Reserve Chairman Jerome Powell has also pointed out that several economic reports, including employment and inflation data for the next two months, could alter their rate path considerations before the September rate meeting.

The U.S. stock market, which has repeatedly hit record highs, is also supporting the dollar exchange rate. The S&P 500 index is on track for a third consecutive month of gains, attracting funds from global investors. Additionally, the strong earnings of tech giants highlight the absolute dominance of the U.S. in the artificial intelligence race, increasingly drawing global capital into the U.S. stock market.

Despite concerns during the sell-off that international investors would continuously abandon their U.S. assets, the latest data shows that this has not actually occurred. In May, overseas investors increased their holdings of U.S. Treasury bonds, while the dollar's share in the 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 Trump to throw out a major surprise or for the U.S. domestic economy to show a significant slowdown," said Ben Ford, a foreign exchange strategist at Macro Hive.

Another factor boosting the dollar against major sovereign currencies like the euro and yen is that Trump has negotiated several trade agreements that are more favorable to the U.S. economy. This month, the euro has fallen nearly 3% against the dollar, with German industry leaders warning that tariffs will weaken Europe's market competitiveness.

"Regardless of how the details are dissected, these trade agreements seem to be an embarrassing negotiation for Europe," said Brent Donnelly, president and senior foreign exchange trader at Spectra Markets. "It reinforces the U.S.-led trade paradigm."

In July, the yen and pound were the worst-performing currencies against the dollar among the G10, both depreciating by more than 3.5%. The Canadian dollar saw the smallest decline.

Looking ahead to the coming months, options indicate that traders generally expect the dollar to rise moderately. This contrasts sharply with the situation in May and June when they bet that the dollar would continue to depreciate