The Dollar’s Old Playbook Is Back
The dollar has historically tracked US real yields closely, a relationship that wobbled last year amid the knock to confidence in US assets from the US administration’s trade policy. That relationship has since come back – putting the Fed’s rate outlook back as the driver of the dollar’s trajectory.
The yield on inflation-adjusted 10-year Treasuries (TIPS) climbed above 2.3% last week, its highest level in more than a year, as investors price in tighter Fed policy ahead.
That has created a genuine split among investors rather than a consensus trade. Some are long the dollar precisely because it currently offers both a high yield and superior growth relative to peers. Some banks have upgraded dollar forecasts into the third quarter on the view that resilient growth should keep US real rates elevated and recommending clients buy the dollar against lower-yielding currencies.
Others take the opposite side of the same logic, arguing the labor market is telling a more nuanced story than headline growth suggests, expecting the Fed to stay on hold, and thinking real yields have likely already peaked.
Positioning data suggests the bullish camp is currently winning the argument – according to the CFTC, speculative derivatives traders are now the most bullish on the dollar since 2015, as of the week ended 7 July. That is itself a source of risk given how quickly crowded positioning can unwind.
Growth Is Resilient – But Warning Signs Are Flashing
While the wobble in US assets confidence is behind us for now, recent dollar strength is more a result of the continuing robustness of US growth, as opposed to safe-haven status.
Real GDP grew at an annualized 2.1% in Q1 2026, up from 0.5% in Q4 2025, and the economy has continued to outperform its peers by enough that investors are comfortable running a long-dollar position.
That said, the Atlanta Fed’s real-time GDPNow tracker for Q2 has cooled markedly since mid-June, falling from 3.0% on 17 June to just 1.3% by 8 July. June payrolls also came in soft, at 57,000 against a forecast of 113,000.
Neither data point has yet dented the broader narrative – growth is still growth, and Fed officials and dollar bulls alike continue to lean on it – but it’s the kind of early divergence between a real-time tracker and the prevailing narrative that risk managers should keep on their dashboard rather than dismiss.
If it persists into the next GDP print, the “resilient growth, hawkish Fed” story that’s currently supporting the dollar could shift quickly.
A New Fed Chair, A Shorter Script
The first FOMC minutes of Kevin Warsh’s tenure as chair, released this month, showed policymakers generally agreed that some further policy firming would likely be warranted if inflation remained elevated, with price pressures dominating discussion at his first meeting in charge.
What’s arguably more significant than the substance is the format. Warsh’s post-meeting press conference was notably shorter than his predecessor’s, with no additional info on the FOMC’s interest rate forecasts. For markets used to parsing dot plots and lengthy statements for clues, a chair who is actively withholding that guidance changes the nature of the guessing game.
Warsh makes his first congressional appearance as chairman this week, testifying before the House Financial Services Committee on 14th July and the Senate Banking Committee on 15th July. Swaps traders will be watching closely: pricing for Fed tightening by December has risen to nearly 40 basis points at time of writing, up from around 15 basis points in early June.
While the change in stance around length of the press conference does not tell us anything fundamental about a change in approach to policy, it does open the door to more volatile conditions in the short end of the curve.
What This Means for Risk Managers
The common thread running through these developments is not simply increased uncertainty, but the speed at which market narratives can shift. Expectations around US growth, real yields and the Fed remain closely intertwined, meaning relatively small changes in the data have the potential to trigger outsized moves in currency markets.
Against that backdrop, the focus for risk managers is less about predicting the next market move than understanding where exposures lie, regularly reassessing the assumptions behind existing hedging strategies, and ensuring those strategies remain supported by clear commercial rationale and robust documentation. Good governance becomes even more valuable when markets are moving quickly.
Periods of heightened volatility rarely offer the luxury of time to react. Having a well-defined risk framework in place before conditions change can help organizations respond with confidence rather than urgency.
Supporting clients in building and maintaining that framework – through risk analysis, hedging strategy and governance – is an important part of the work we do.
