The US dollar rose against major currencies on Wednesday after the Federal Reserve kept interest rates unchanged, in line with market expectations, despite pressure from US President Donald Trump.
The Federal Open Market Committee voted 9 to 2 in favor of keeping the benchmark overnight interest rate in a range between 4.25% and 4.50%, marking the fifth consecutive meeting with no change.
Vice Chair for Supervision “Michelle Bowman” and Board Governor “Christopher Waller” — both Trump appointees — dissented, expressing a preference to cut interest rates by 25 basis points.
In a press conference following the decision, Federal Reserve Chair Jerome Powell said he expects the process of understanding the impact of tariffs on inflation to be “slow.”
“Otto Shienhara,” Chief Investment Strategist at “Mesirow Currency Management” in Chicago, said: “The Fed’s decision to leave interest rates unchanged wasn’t a surprise, but the market noted the two dissenting votes in favor of a cut.”
He added: “The dollar remained well supported following strong economic data this morning and the Fed announcement, while the market viewed the September meeting as a near coin toss.”
Investors’ conviction that Trump’s tariffs and excessive spending would cause long-term damage to the dollar and US equities is beginning to crumble, signaling tough times ahead for European and emerging market assets that previously benefited from this belief.
After recording its worst first-half performance since 1973, the dollar is now on track to post its first monthly gain in 2025, following the Fed’s refusal to cut interest rates, stronger-than-expected US growth data, and easing fears of a trade war.
This trend puts what is known as the “rest-of-world trade” — which hinges on declining confidence in US assets but is actually driven by investors’ desire to reduce exposure to a weakening dollar — at risk, according to investors.
On Thursday, futures trading pointed to US equities posting daily gains exceeding 1%, which could end the outperformance that European stocks have enjoyed this year, while the euro and emerging market assets in Asia fell sharply.
“Shaniel Ramji,” Co-Head of Multi-Asset Management at “Pictet Asset Management,” said: “Being bearish on the dollar and the US is one of the biggest positions among investors.” He added that he is preparing to increase his dollar exposure after being “close to zero,” expecting US economic trends to begin outperforming their European counterparts.
He pointed out that a broad dollar recovery could halt the major market trends of 2025.
With US rate cut expectations declining on Thursday, some investors said the Fed may support the idea of a dollar rebound to offset the impact of higher import costs from tariffs on consumer price inflation.
As of mid-July, the conviction that the dollar would decline was the most crowded trade among global fund managers, according to Bank of America research.
This large anti-dollar bet — estimated at $18 billion and considered the largest trade in FX markets — came under pressure after the euro, which had risen to $1.1789 earlier this month, fell to $1.1401 after the Fed meeting on Wednesday.
The single European currency, which recorded its best half-year performance in its 26-year history during the first half of the year, is now heading for its biggest monthly drop against the dollar since May 2023.
On Thursday, the MSCI Emerging Markets Asia stock index fell more than 1% to a two-week low, while the MSCI Emerging Market Currency Index was headed for its first monthly loss of the year.
Meanwhile, the British pound was on track for a weekly loss of 1.6%, potentially marking its worst weekly performance since the UK market turmoil in January.
“Michael Nezard,” Head of Multi-Asset at “Edmond de Rothschild Asset Management,” said: “We are seeing a shift toward US equities, a shift in FX markets, and a shift in momentum.”
He cited the trade framework agreement reached on Sunday between Washington and Brussels as one of the main reasons behind this trend, stating that he does not expect it to last through the end of the year, and added that he would buy the euro when it nears the $1.14 level.
However, “Bettina Edmonston,” Portfolio Manager at “River Global,” said the strength of the dollar would help curb US inflation, meaning that the Fed’s “put” — where the central bank intervenes to support falling markets with monetary policy — may have been reactivated in favor of the dollar.
She added: “I don’t expect interest rates to fall, which logically suggests the dollar will strengthen.”
Temporary?
“Monica Defend,” Head of the Investment Institute at “Amundi” — the largest asset manager in Europe — said she still holds her long-term view that the dollar is on a path of decline, due to Trump’s borrowing plans and ongoing attacks on the Fed’s independence.
But she added she is prepared to revise that view “if US growth surprises to the upside,” should the trend continue.
She said: “US exceptionalism may persist, not necessarily at the macro level, but more in the stock market.”
For his part, “Mark Ellis,” Chief Investment Officer at “Nutshell Asset Management,” said he is not certain that the US dollar and US equities will continue to rise together in August, traditionally one of the most volatile months for markets.
He added: “The end of this week marks a good time to reduce risk, and I’ll be more cautious as we enter the usual period of summer volatility and weakness.”
Meanwhile, “Emmanuel Cau,” Head of European Equity Strategy at “Barclays,” issued a different warning in a client note dated July 30.
He noted that trend-following hedge funds — known as CTAs — whose trades are a barometer of market sentiment, had closed their bets against US bonds and cut exposure to European equities.
He concluded by saying that “any more sustained dollar rebound would be one of the most painful challenges for global investors going forward.”
In trading, the US dollar index rose by 0.1% as of 11:56 GMT to 99.8 points, recording a high of 99.9 and a low of 99.5.
