US Dollar Strength: Momentum Building?

EUR: EU Budget Faces German Opposition, Euro Outlook Remains Cautious

The European Union’s enterprising EUR 2 trillion budget proposal is encountering significant headwinds, particularly from Germany.Chancellor Friedrich Merz has openly acknowledged the upcoming “tough fight” over the budget for the next two years, casting doubt on the likelihood of Ursula von der Leyen’s plan securing unanimous approval without significant revisions.

While this budget debate was intended as a long-term consideration for the euro, the currency is currently more closely tracking developments in the United states amidst subdued market expectations.Though, the upcoming European Central Bank (ECB) meeting next week could prove more impactful than initially anticipated.although a rate cut is considered improbable based on recent ECB communications, emerging tariff risks and a strengthening euro might reignite dovish sentiment within the central bank, which had previously appeared settled on a neutral monetary policy stance.

This recalibration of expectations contributes to ING’s moderately bearish outlook on EUR/USD, with a near-term target of 1.150.JPY: Japanese Election Looms, USD/JPY Poised for Upside

An upcoming upper house election in Japan this Sunday is shaping up to be a critical event for Japanese Government Bonds (JGBs) and the yen. The recent surge in long-dated JGB yields suggests that markets are pricing in a notable probability of Prime Minister Shigeru Ishiba’s coalition losing its parliamentary majority. Such an outcome could trigger his potential resignation and open the door for opposition parties to implement their tax-cutting agendas.

while opposition leaders have attempted to reassure markets regarding the fiscal sustainability of any expansionary measures, risks persist. Delicate US-Japan trade negotiations could also face disruptions.

If the anticipated electoral outcome materializes, it would likely exert additional pressure on long-dated JGBs, potentially propelling USD/JPY above the 150.00 level. While it’s acknowledged that not all fiscal concerns may fully materialize, and the negative spillover affect on the yen could eventually subside, the immediate near-term outlook is being influenced by renewed dollar momentum and growing skepticism surrounding the Federal Reserve’s capacity to manage inflationary pressures.These factors are collectively fueling the upward trend in USD/JPY.

How might shifts in Federal Reserve policy influence the trajectory of USD strength?

Recent Drivers of USD Thankfulness

The US Dollar (USD) has demonstrated notable strength throughout the first half of 2025, and current indicators suggest this momentum may be building.Several key factors are contributing to this trend. Understanding these drivers is crucial for investors, businesses engaged in international trade, and anyone monitoring the global economy.

Federal Reserve Policy: The federal Reserve’s (Fed) relatively hawkish stance on monetary policy, maintaining higher interest rates for a longer period compared to other major central banks, remains a primary driver. Higher interest rates attract foreign capital seeking better returns, increasing demand for the USD. This is a core element of USD strength.

US Economic Resilience: Despite concerns about a potential slowdown, the US economy has shown surprising resilience. strong labor market data, robust consumer spending, and continued (albeit moderating) growth in the services sector all contribute to a positive outlook for the US, bolstering the dollar.

Safe-Haven Demand: Geopolitical uncertainties – including ongoing conflicts and rising global tensions – often lead to increased demand for safe-haven assets, and the USD is traditionally considered one of the safest. this “flight to safety” phenomenon provides additional support.

Commodity Price Fluctuations: A general decline in commodity prices, notably oil, can negatively impact commodity-exporting nations and their currencies, indirectly benefiting the USD.

Key Economic Indicators to Watch

Monitoring specific economic indicators is vital for assessing the sustainability of USD strength. Here’s what to focus on:

1. Inflation Data: US inflation figures remain central. While inflation has cooled from its 2023 peak, any resurgence could prompt the Fed to maintain its hawkish policy, further strengthening the dollar. Pay close attention to the Consumer Price Index (CPI) and the Personal Consumption expenditures (PCE) price index.
2. Employment Reports: the monthly US employment report provides crucial insights into the health of the labor market. Continued strong job growth suggests a robust economy, supporting USD appreciation.
3. GDP Growth: Quarterly GDP growth figures offer a broader picture of economic activity. Positive growth reinforces the narrative of US economic strength.
4. Interest Rate Differentials: The difference between US interest rates and those of other major economies (Eurozone, Japan, UK) is a key determinant of capital flows and, consequently, USD value.
5. Purchasing Managers’ Index (PMI): Both manufacturing and services PMIs provide leading indicators of economic health.

Impact on Global Markets & Trade

A strengthening USD has critically important implications for global markets and international trade.

Emerging Markets: A strong dollar can create headwinds for emerging market economies, particularly those with significant USD-denominated debt. It increases the cost of servicing that debt and can lead to capital outflows. Emerging market currencies often weaken against the USD.

US Exports: A stronger dollar makes US exports more expensive for foreign buyers, perhaps reducing demand and impacting US companies’ international sales.

Import Costs: Conversely, a strong dollar makes imports cheaper for US consumers and businesses.

Commodity Prices: As mentioned earlier, a strong dollar frequently enough correlates with lower commodity prices, as commodities are typically priced in USD.

Foreign Exchange Reserves: Central banks holding significant USD reserves may see the value of those reserves increase.

Past Context: USD Strength Cycles

Looking back at historical trends reveals that periods of USD strength are often cyclical. The late 1990s and the mid-2010s saw similar periods of sustained USD appreciation, driven by factors such as strong US economic growth and favorable interest rate differentials. Though, these periods were eventually followed by periods of USD weakness.

Case Study: The 2014-2016 USD Rally: From mid-2014 to late 2016, the USD experienced a significant rally, fueled by the Fed’s tightening monetary policy and a diverging economic outlook between the US and other major economies. This period provides valuable lessons about the potential duration and impact of USD strength.

Potential Risks to USD Strength

While the current momentum appears strong, several risks could derail the USD’s upward trajectory.

US Recession: A significant economic slowdown or recession in the US would likely undermine confidence in the dollar and lead to a reversal of its strength.

Shift in Fed Policy: A more dovish stance from the Fed, signaling a willingness to cut interest rates sooner than expected, could weaken the dollar.

Escalation of Geopolitical Tensions: While current tensions are supporting safe-haven demand, a major escalation could lead to unpredictable market reactions and potentially weaken the USD.

Unexpected Economic shocks: Unforeseen events, such as a major financial crisis or a global pandemic, could disrupt economic activity and impact currency valuations.

Benefits of a Strong US Dollar

Despite the challenges for exporters, a strong USD offers certain benefits:

Reduced Inflation: Cheaper imports help to contain inflationary pressures within the US.

Increased Purchasing Power: US consumers benefit from increased purchasing power when buying goods and services from abroad.

Attracts Foreign Investment: A strong and stable USD attracts foreign investment, boosting economic growth.

Lower Commodity Costs: Lower commodity prices reduce input costs for businesses and benefit consumers.

Practical Tips for Navigating USD Volatility

Diversify Currency Holdings: Don’t put all your eggs in one basket. diversifying your currency holdings can help mitigate risk.

* Hedge Currency Exposure: Businesses engaged in international trade should consider hedging their currency exposure to protect against adverse movements in exchange