The US dollar has gained strength against commodity currencies, rising by 1.09% against the Australian dollar (AUD), 0.63% against the Canadian dollar (CAD), and 0.61% against the New Zealand dollar (NZD). The dollar also increased by 0.48% against the euro (EUR) and 0.55% against the Japanese yen (JPY), while its rise against the British pound (GBP) was smaller, at 0.22%. US yields are on the rise, with the two-year yield increasing by 3.2 basis points to 3.917% and the 10-year yield rising by 1.4 basis points. These factors are helping to strengthen the USD.

Tariff Impacts

Tariffs are a concern, especially for Germany’s economy. Without them, inflation could be around 2%. However, current tariffs may add about 1% to inflation from late 2025 to 2026. Inflation dipped to 2.5% in June, with core inflation at 2.75%. Expectations include inflation rates of 3%-3.5% this year, 2.5% in 2026, and a decrease to 2% in 2027. The labor market is slowing down, with job growth easing and unemployment projected at 4.5% by the end of the year. Economic growth is estimated at around 1% for 2025, due to uncertainties. Disinflation continues amid supportive financial conditions. The current Fed policy aims to gently impact the labor market while allowing adjustments based on data.

Strategies and Market Volatility

With the dollar gaining momentum, we should consider strategies that benefit from its strength, especially against the Australian and New Zealand dollars. The rise in short-term US yields, particularly with the two-year rate above 3.9%, supports these positions. The U.S. Dollar Index (DXY) has recently traded at multi-month highs above 107. Statements from Williams emphasize a patient, data-driven approach from the central bank. Therefore, we should expect higher market volatility surrounding key economic reports. Upcoming inflation and employment data will be significant, making options strategies like long straddles appealing around those times. Historical patterns show that Fed “wait-and-see” periods often lead to volatile, news-driven markets. Nagel’s concerns about tariffs affecting the German economy suggest significant risks for the euro. Thus, we should consider positioning ourselves for a potential drop in the EUR/USD pair, as a possible recession in Germany could impact the entire Eurozone. Recent data, like the German Ifo Business Climate index falling to 87.3 in June, supports these worries about Europe’s largest economy. The forecast for U.S. inflation to stay above 3% for the rest of the year strengthens the argument for sustained higher interest rates. Market expectations reflect this, as the CME FedWatch Tool now shows less than a 50% chance of a rate cut in September, down from over 65% a month ago. This shift makes maintaining long dollar positions more appealing as interest rate differences remain favorable. With U.S. unemployment expected to rise to 4.5% and growth slowing, we see a controlled economic cooling rather than a crash. This managed slowdown gives policymakers space to keep their current approach without rushing into cuts. This stability, especially in comparison to growing uncertainty elsewhere, should continue to draw capital into the U.S., thus supporting the dollar. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now