Trump welcomes "best month for the US dollar" since taking office, strong dollar paradigm returns for a limited time?

With the robust GDP growth of the world's largest economy, the signing of trade agreements by the Trump administration with multiple trading partners, and the expected rate cut by the Federal Reserve due to Powell's hawkish signal and unexpected increase in core PCE, the US dollar is set to have its best month since 2025. The dollar's rebound this time also marks a major reversal in this historic period of weakness so far this year, and recent economic data, Trump-led trade negotiations, and options market bets indicate a potential rebound in the second half of the year for the dollar, but long-term market sentiment still leans bearish. Statistics show that as of early trading in the US time, the Bloomberg US Dollar Spot Index rose by 2.5% in July, the only month with an increase since President Donald Trump's official inauguration in January. Despite Fed officials stating that economic growth is slowing down, data released this week shows that the US economy expanded in the second quarter at a faster-than-expected rate of 3%, a sturdy figure considering the changing trade policies. Expectations for a rate cut decreased as Fed Chairman Powell stated that the current rate levels are appropriate given the uncertainty around tariffs and inflation, and the core PCE price index rose by 2.8% in June, surpassing expectations and reaching its highest level since February. Fed Chairman Powell hinted at a press conference on Wednesday that benchmark interest rates may remain higher for a longer period, helping drive the dollar index higher and narrowing its annual decline to 7%. Following five consecutive days of gains, the dollar index held steady on Thursday. "After a period of noticeable weakness, we see some buying of the dollar due to the resilience of US economic data, progress in tariff negotiations, and the exhaustion of short positions," said Nathan Thufte, Senior Portfolio Manager at Amundi Investments. The dollar is expected to have its best month so far this year the US currency rebounded after falling for six consecutive months Currently, the interest rate swap market shows a 40% probability of a rate cut by the Fed in September and an 80% probability in October actions that were almost certain before Powell's speech on Wednesday. Even if only temporary, the dollar's rebound this time also marks a major reversal in this historic period of weakness so far this year. Trump's trade war and the drastic economic turmoil caused by policy reversals, along with the tax cut legislation that could greatly expand the US budget deficit, have significantly weakened the dollar's status as the global reserve currency and eroded the notion of "American exceptionalism." "In the coming weeks, the dollar is likely to strengthen further. Resilient US economic data, the Fed's lack of preparedness for a rate cut, and a wave of new trade agreements being reached will all support a stronger dollar," said Noel Ali, a strategist at Bloomberg. The upcoming non-farm payroll report to be released on Friday will provide investors with another important reading of the US economy. Powell also pointed out that several economic reports, including employment and inflation data for the next two months, may alter their rate path considerations before the September rate meeting. The continuously hitting new highs in the US stock market also supports the dollar exchange rate. The S&P 500 index is on track for its third consecutive month of gains, especially as tech giants like Nvidia and Microsoft, with market values exceeding $4 trillion, attract funds from global investors. In addition, the strong earnings of tech giants highlight the US's absolute dominance in the artificial intelligence competition, further attracting global funds to the US stock market. Despite concerns during the sell-off period that international investors would continue to abandon their US assets, the latest data shows that this scenario has not actually occurred. Overseas investors increased their holdings of US Treasury securities in May, and the share of the US dollar in foreign exchange reserves held by global monetary authorities remained stable in the first quarter of 2025. "To continue shorting the US dollar against a basket of currencies, we need a major unexpected move from Trump or a noticeable slowdown in the US domestic economy," said Ben Ford, FX strategist at Macro Hive. Another factor boosting the dollar against major sovereign currencies like the euro and yen is that Trump has successfully negotiated multiple trade agreements that favor the US economy. This month, the euro fell nearly 3% against the dollar, and German industry leaders warned that tariffs would weaken Europe's market competitiveness. "Regardless of the details, these trade agreements seem to be an embarrassing negotiation for Europe. It reinforces the US-led trade paradigm," said Brent Donnelly, President and Senior Forex Trader at Spectra Markets. In July, the yen and pound were the worst-performing currencies against the US dollar among the G10 countries, both depreciating by over 3.5%. The Canadian dollar saw the smallest decline. Looking ahead to the next few months, options indicate that traders generally expect a moderate increase in the US dollar. This is in stark contrast to May and June when they were betting on the continued depreciation of the dollar.