- The US Dollar Index retreated for the second consecutive week.
- Speculation over who will succeed Powell remained on the rise.
- Investors shift their attention to the Jackson Hole Symposium.
The week that was
The US Dollar (USD) extended last week’s slide, with the US Dollar Index (DXY) dipping to two-week lows under the 98.00 mark and stretching its retreat from August’s push above the key 100.00 level.
August has got off to a shaky start, wiping out much of July’s rebound and putting the broader downtrend back in motion. The index has so far managed to hold above 96.40 — the multi-year low touched on July 1.
Trade tensions have eased a touch after the US and China agreed to extend their truce for another 90 days, but the risk of fresh tariffs on India and Russia is still in the air.
Meanwhile, questions over the Fed’s independence and speculation about who might replace Chair Jerome Powell continue to swirl in the background.
Trump’s ‘erdoganisation’?
US President Donald Trump has reignited worries about a more politicised Federal Reserve (Fed).
It started with his sudden dismissal of the Bureau of Labor Statistics (BLS) commissioner, after accusing — without evidence — the agency of “rigging” jobs data, a charge that came on the heels of hefty downward revisions to payroll figures.
He then renewed his public attacks on Fed Chair Jerome Powell and nominated Stephen Miran, now head of the Council of Economic Advisors, to replace departing FOMC Governor Adriana Kugler.
Adding to the intrigue, reports indicate that FOMC Governor Christopher Waller — regarded as a policy dove — has risen to the top of Trump’s shortlist to replace Powell. Taken together, these developments point to a Fed that may be more politically influenced and more willing to deliver the sharp rate cuts Trump has long demanded.
To complete the circle, all that’s left is for President Trump to claim that higher interest rates actually fuel inflation — a twist that would neatly fold into his calls for “much lower” interest rates.
Tariffs: Short-term gain, long-term pain?
Tariffs may be a crowd-pleaser in Washington, but their political charm comes with a hefty price tag over time. For now, consumers have dodged major price spikes, yet if these levies stick around, the pinch will grow — driving up the cost of essentials, squeezing household budgets, and weighing on growth. If inflation were to flare up again, that mix could leave the Fed in an uncomfortable corner.
Some in policymaking circles appear open to letting the US Dollar weaken, betting it could lift exports and help close the trade gap. Reshoring manufacturing is an admirable aim, but rebuilding America’s industrial muscle will take time, serious investment, and a sharper tariff strategy.
Duties can be part of the toolkit, but they’re no cure-all for the deeper structural imbalances in global trade.
Fed cautious stance prevails for now
The Fed left interest rates unchanged on July 30, holding the fed funds target at 4.25%–4.50% for a fifth straight meeting as policymakers balanced persistent inflation against signs of a cooling economy.
The statement acknowledged that “unemployment is still low and labour market conditions are solid, but inflation remains elevated,” offering little guidance on when — or even if — rate cuts might come.
The decision wasn’t unanimous. Vice-Chair for Supervision Michelle Bowman and Governor Christopher Waller, both appointed by Donald Trump, pushed for an immediate 25 bps cut, arguing that policy is already too restrictive.
In his press conference, Chair Jerome Powell described the labour market as “effectively at full employment”, satisfying one side of the Fed’s dual mandate. But with inflation still above target and complicated by tariff effects, he said keeping policy “modestly restrictive” is the most prudent path for now.
Fed policymakers offered a mixed set of messages this week as they weighed the economic impact of tariffs, the resilience of household spending, and the trajectory for interest rates.
Richmond Fed President Tom Barkin said strong consumer spending may be softening the inflationary blow from tariffs but warned it could eventually tip into weaker demand and higher unemployment. Still, he’s hopeful a spike in joblessness can be avoided, pointing to solid household outlays. Barkin added that some of the “fog” over the outlook is lifting thanks to the passage of a major tax bill, more clarity on immigration changes, and finalised tariff and trade deals.
Kansas City Fed President Jeffrey Schmid pushed back against the idea that muted tariff effects justify rate cuts, arguing instead that current policy is “appropriately calibrated.” He favours patience, noting it’s too early to know if tariff-driven price pressures will be temporary or persistent.
Atlanta Fed President Raphael Bostic highlighted the “luxury” of a job market still near full employment, saying that gives the Fed room to avoid policy volatility and wait for clearer signals before adjusting rates.
Chicago Fed President Austan Goolsbee struck a cautious tone, expressing discomfort with assuming tariffs won’t fuel inflation and scepticism about claims that the labour market is weakening. While he hasn’t endorsed cuts, he left the door open to joining the more dovish camp by the September 16–17 meeting.
What’s next for the US Dollar?
Next week’s calendar is headlined by the release of the FOMC Minutes, but the main event will likely be the Jackson Hole Symposium, where Chair Powell is set to speak on August 22.
What about techs?
If the DXY slips below its multi-year low of 96.37 (July 1), the next major supports line up at 95.13 (February 4) and 94.62 (January 14).
On the flip side, the first obstacle is the August high at 100.25 (August 1); a decisive break there could clear the way to 100.54 (May 29) and then the May peak at 101.97 (May 12).
At present, the index is trading beneath both its 200-day and 200-week simple moving averages — at 103.00 and 103.13 respectively — which keeps the broader bias tilted toward weakness.
Momentum indicators are also softening: the Relative Strength Index (RSI) has eased to nearly 46, suggesting waning bullish momentum, while the Average Directional Index (ADX) is holding near 13, signalling a lack of strong directional trend.
To sum up
The Greenback’s struggles have as much to do with Washington as with Wall Street. Traders point to President Trump’s erratic tariff threats, his public clashes with Fed Chair Jerome Powell, and ballooning federal debt — all of which have pushed up the “term premium” demanded on long-dated Treasuries. In simple terms, holding US assets feels riskier, so investors want more compensation.
Even when the US Dollar catches a bid, rallies rarely last.
Trade policy can shift on a tweet, and Trump’s splashy ‘Big and Beautiful Bill’ has only deepened fiscal concerns. With little clarity on future deficits, the market remains reluctant to bet on a sustained rebound.
The Fed, meanwhile, is staying cautious and data-dependent, meaning the next rate decision could just as easily give the currency a lift as send it lower. For now, most strategists see more room for downside than upside. An entrenched trade gap, political incentives for a weaker currency, and persistent doubts about Fed independence all suggest a softer DXY ahead.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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