Monthly Currency Outlook — August 2026

In Brief

What Happened

• July countered the gains in June as the U.S. Dollar fell by 1.4% in overall value, according to the Bloomberg Dollar Spot Index
• Suddenly, the “hawkish” tilt that the Fed carried after Kevin Warsh’s introduction as new Chairman turned into “dovishness” with a lack of consensus on hiking
• The back-and-forth continues regarding peace in the Middle East with fragile diplomacy and new battlefronts
• All G-10 peers managed to register a gain against the Buck with an average of 2.1% in appreciation, with Euro and Sterling having their best month since April
• Colombian Peso (COP) marches on as best performer of the year with a 19.6% surge thus far in 2026

Monex USA's View

• Strikes over Iran have ceased at the start of August with renewed hope that insistence from other nations results in a permanent peace deal
• Without central bank action this month, efforts towards ending attacks or exacerbation of the violence will be the biggest risk factors
• Data is suggesting an economic slowdown, so plenty of economic indicators may help establish how bad
• EUR and GBP could see further resurgence as new leadership looks to amend ties, counter “Brexit”
• U.S. Dollar may be losing safe-haven role appeal as a mix of items foster doubt on its stability

In focus

BDXY: While staying mostly flat throughout the month, the end of July marked a big drop for the Buck

(Bloomberg chart shows how the last week of July turned sour for the U.S. Dollar with data adding to concerns)

U.S. Dollar woes return after perception of a Fed driven to battle inflation faded away

• Throughout the final days of July, the Federal Reserve did not seem in accord that interest-rate increments must be exercised to combat inflation
• Much like we foresaw, the Fed’s new leader did not communicate his thinking nor plans ahead, leaving traders convinced of minimal guidance in the future
• June’s Consumer Price Index revealed (-0.4%) deflation, suggesting that price growth may no longer be the peril it was earlier in the year
• Q2 Gross Domestic Product (GDP) came in at 1.5% vs. 2.0% forecast, fueling worries of U.S. decline

THE VIEW — Difficult times for U.S. advancement as Fed hesitates

A new regime appears less predictable, underwhelming USD bulls

It is time to get used to the Fed no longer telegraphing its moves. Following a period of resurgence, the U.S. Dollar fell to its weakest overall level since mid-June after a Fed meeting that left markets with more questions than answers. Officials seemed satisfied with the economy, but there was no consensus, as the voting members disagreed by a tally of 9-3. The three in the minority called for a 25-basis-point hike.

Fed head Kevin Warsh was not one of them; in fact, he continued with his previous sentiment that inflationary pressures have subsided when providing commentary on his line of thinking. The mix of lowered odds that the Fed hikes borrowing costs for the remainder of the year, evidence of easing consumer prices, and disappointing economic activity bodes poorly for the Buck’s dominance.

(Bloomberg chart with MSCI EM Currency Index through 2026 thus far, jumping to new all-time records)

As seen in the graph above, the USD is facing trouble across the board. Much of what drives investors and traders toward the safety of the U.S. Dollar is an unshakable faith in the Federal Reserve and its competence to handle the moment. With turbulence from the war, tariff idiosyncrasies, and inconsistent economic productivity, analysts, as much as anybody else in the markets, want the Fed to exude a steady hand.

After the post-decision press conference, the reaction indicated that markets do not believe Warsh and crew have the ability to rein in inflation, while 2026 could end without a jump in current interest rates. Per the World Interest Rate Probability and Overnight Swaps, there is less than a 60.0% chance that the Federal Open Market Committee raises interest rates at its September 16 meeting. Some economists argue that the timing of the midterm elections in November also makes it inconvenient to make a move now, making December a more likely scenario.

Nevertheless, Warsh does not seem very interested in messaging what comes next. It is this attitude that has made traders question whether what they know about monetary policy could radically reformulate their expectations. The change in leadership style may also lead to an overhaul in how the Fed replies to inquiries going forward. There was even talk on financial news broadcasts about the Fed reducing the number of meetings it holds in a year. Although no real transformation has taken form, the ideas circulating are indicative of a desire not to keep things the same.

July was a test of the Dollar’s strengthening, which concluded without finding much merit to maintain its momentum. Surveys have shown dissatisfaction with the economic situation, while the effects of the armed conflict continue to create anxiety about energy affordability and access. We believe uncertainty may no longer benefit the Buck as a go-to safe haven while economic indicators fail to impress and consumers suffer.

A staple of security has recovered, though, in the form of the Japanese Yen, which experienced its best monthly performance since April 2025. After trading at its weakest value in 40 years, the recovery for the Yen was fueled by FX intervention, something utilized before without the success of the latest rounds. Japan’s Finance Minister Satsuki Katayama joined forces with U.S. Secretary Scott Bessent to deliver tens of billions of dollars as July closed.

At first, there was no clarity as to why the Yen’s value skyrocketed, but it became clear that the operations coordinated in recent days carried a lot more weight than before, as the U.S. provided aid along with South Korea. Although the advance for the Yen is welcome news, some analysts are pointing out that there may not be much more to be done after exhausting some financial tools and even partnering with other authorities. On the other hand, some analysts feel there is a new level for USD/JPY to be tested and that officials have plenty of arsenal at their disposal to mediate further. As far as the Bank of Japan is concerned, the environment remains healthy, while there is a 50.0% chance that a hike materializes by year-end.

On the other side of the pond, a change of the guard has taken place with the formal introduction of Andy Burnham as U.K. Prime Minister. He is the sixth PM to take office since the resignation of David Cameron following the Brexit vote of June 2016. The former Mayor of Greater Manchester comes into the role as the U.K. economy is improving slightly, with the latest GDP gauge for the three months through May surprising at a pace of 0.7% growth vs. 0.5% estimated.

Mr. Burnham is also entering into a period of reconsideration regarding resetting the clock and working alongside the European Union on a variety of issues. An olive branch was handed back in June when European Central Bank council member Olaf Sleijpen said that the U.K. can help the EU advance its Capital Markets Union, highlighting its experience in financial reform and calling for more integration between the two. With 52.0% of Britons wanting to reunite, could it happen?

Each month Monex publishes an updated currency outlook covering central bank action, macroeconomic data, and projected FX rate targets across G10 and emerging-market currencies.