Monthly Currency Outlook — July 2026

In Brief

What Happened

• Per the Bloomberg Dollar Spot Index (BDXY), June marked the third best monthly performance for USD in the past 18 months, rising approximately 2.0%
• Perceived as a “hawkish” tilt, the newly presided Federal Reserve by Kevin Warsh is prioritizing the battle against stubborn inflation
• After back-and-forth negotiations, the U.S., Israel, and Iran agreed to a ceasefire agreement, but disturbances around the Strait of Hormuz remain
• Buck gained all across the board with Colombian Peso (COP) being the exception after a change of the guard
• The Euro had its weakest month since March and depreciated to its lowest point since May 2025

Monex USA's View

• Regardless of Middle East tensions, inflationary pressures may start fading as more traffic flows through the Persian Gulf
• Central banks will provide some guidance in their July meetings, but expect Fed communication to be reduced from the Jerome Powell era
• Plenty of data looking back at the first half of the year could turn the tide for some currencies, leading to more idiosyncratic moves across pairings
• Renewed concern over the future of trade as the U.S. wants to review terms of the USMCA pact (NAFTA)
• Economic performance could sustain Dollar gains, but pessimism and Fed “dovishness” might derail

In focus

BDXY: March was the start of war and a USD surge that ran into challenges, but survived in Q2

(Bloomberg chart shows a crater formed in Q2 as the Buck immediately fell following a rally in March)

“Petro-Dollar” effect faded away, but the role of safe-haven asset keeps Buck buoyant

• According to the BDXY, the U.S. Dollar experienced a modest 0.6% bump for the second quarter of the year, swinging wildly throughout
• May as well as February were characterized by being months of stagnant FX moves, sticking range-bound within 0.6% and 0.1% respectively
• Economic divergence is playing a role in supporting the Buck with the effects of the strikes in Iran having a more negative impact on global productivity
• A mix of possible monetary policy tightening, diplomacy, and stability could keep USD steady

THE VIEW — USD flexed a bit of strength in the first half of the year

Turmoil, policy uncertainty, and conflict resulted in USD-1.5% appreciation H1

Clarity is what markets seek most. Ever since the beginning of last year, investors and traders have learned to cope with rapid changes and narrative shifts fomenting confusion and a questioning of established norms. Throughout the first half of 2026, it seems as if almost every factor imaginable has been dealt with: war, energy access, innovation, monetary policy, unprecedented weather and changes to political leadership.

Following FX flows and reasons behind them has not been an easy ride. Nevertheless, there is a steadiness to the American economy that has provided a brief return to the idea of American “exceptionalism,” as the economic activity stay consistent in the midst of chaos affecting elsewhere with the geographic advantage helping in a big way. U.S. Dollar value, however, will be challenged.

(Bloomberg chart with MSCI EM Currency Index throughout Q2, jumping to a February best, diminishing to a 0.5% rise)

In terms of growth, it is safe to say that the American situation is a bit better off than other advanced economies, which were hurt by the quick deterioration of energy access. Although we mentioned in previous writings being stuck in a bit of “stagflation” mode, the U.S. proved to have a lot more muscle since the start of the year than its peers. Released towards the end of the month prior, the final revision of Q1 Gross Domestic Product revealed a stronger advancement than originally calculated, climbing from 1.6% to 2.1%.

One of the few flaws in Q1 data was how GDP improvement was not accompanied by increases in Personal Consumption. In fact, the figure had to be downwardly revised from 1.4% to 0.5%. It makes sense when you look at how inflationary pressures have made consumers think twice about their choices, particularly when it comes to travel and moving around with fuel-related costs accounting for more than half the monthly gain for May’s Consumer Price Index. CPI came in at 4.2% registering the highest reading since early 2023. Back in January, CPI averaged 2.4%, meaning inflation has nearly doubled in the span of four months.

On June 17th, the Federal Open Market Committee announced its monetary policy decision while featuring Kevin Warsh in his first press conference as chairman. As expected, members voted to keep interest rates unchanged, but it is important to recognize why the Buck jumped so fast after a non-action gathering.

Warsh was chosen after replacing candidates that in the eyes of markets looked ready to act “dovishly” and promote the slash of interest rates in order to boost lending, borrowing, and overall investment behind a strategy supporting the White House’s opinion to be stimulus-driven. Expressing himself cautiously and delegating questions to newly designed task forces, sent a message to all that the forward guidance of Powell’s reign may go away while Warsh seeks to defend the independence and autonomy of the Fed in his own ways.

Ultimately, the fear that Powell’s successor would be one to swiftly turn to cutting borrowing costs to satisfy the U.S. President did not materialize. There is nothing more important to the respect behind USD value and reliability than an independent Federal Reserve. Additionally, voting members assessed the economy’s status with confidence and foresaw no need to be loose for what is left of the year.

Also, Warsh wants to be more in tune with how economic statistics play out and be more reactionary. At the time of typing, the newly introduced Fed head made comments stating he felt some inflationary risks were coming down at the annual European Central Bank Forum on Central Banking, which certainly lowered Buck value. We believe Warsh is giving himself room to change his mind without telegraphing the Fed’s next measure. He could become a domestic catalyst for dollar depreciation.

In the Pacific Rim, we will watch out for talk and execution of FX interventions as the currency has touched its weakest value against the Buck in 40 years. U.S. Treasury Secretary Scott Bessent has worked closely with Japanese authorities to try balancing the risky operations, but Japan may be running out of chances to see if meddling with FX is worth it. According to reports, they can only intervene just twice between now and November for the International Monetary Fund to still consider the Yen a free-floating currency.

On the other side of the pond, the U.K. said “goodbye” to Prime Minister Keir Starmer after a series of controversies forced his resignation after barely two years in office. Andy Burnham is set to forge a new path focused on a services trade deal with China and mending relations with the European Union after a decade of Brexit that has mostly left Britain worse off. Down in South America, new presidents have been elected, with Abelardo de la Espriella in Colombia and Keiko Fujimori in Peru, both representing a turn toward a center-right, pro-business strategy, particularly aligning with the U.S. security agenda under “Shield of the Americas.” COP climbed more than 4.0% in June to its strongest level since February 2020.

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.