The dollar index is on track for a second consecutive week of gains, having rallied over 2% since the 1 July low of 96.50. While modest compared to the steep losses in the first half of 2025, the dollar has realigned with core macro drivers and notably re-established its positive correlation with 10-year yields, ING’s FX analyst Francesco Pesole notes.

Fed may cut rates at the July meeting

"One of our key calls this summer is that this return to dollar ‘functionality’ reduces the likelihood of new selloffs - unless Trump fires Fed Chair Jay Powell (as Wednesday’s brief dollar collapse showed) or escalates protectionism beyond markets’ current tolerance, particularly against China. We don’t expect either, and still see some dollar support in the coming months as the 14bp priced into the Fed’s September contract unwinds."

"Without Trump’s relentless pressure and the dovish dissent from Christopher Waller and Michelle Bowman, September likely wouldn’t be on the table. Yesterday, we heard from Waller that the Fed should cut rates at the July meeting due to the weakening labour market, while on the data side, retail sales came in strong and initial jobless claims continued to cool. Another surprise: TIC data showed huge $311bn net capital inflows in May, following a very modest $14bn outflow in April. This suggests foreign investors have not lost confidence in dollar-denominated assets, but anecdotal evidence continues to point to higher USD hedging activity, which has contributed to keeping the greenback weak."

"Today’s calendar includes some housing figures and the University of Michigan surveys for June. We’ll see whether 1-year inflation expectations have continued to drop: they are currently at 5%, though opinions diverge sharply between Democrat (very high) and Republican (very low) responders."