The dollar enters the latter half of 2026 on a strong note, driven by expectations of rising U.S. interest rates and a relentless demand for U.S. assets from investors pursuing the notion of “American exceptionalism,” which could lead to further challenges for other currencies. It stands out as the top-performing currency at the mid-year mark, having risen by 3%. This is a stark contrast to the same period last year, when it was experiencing a decline of over 10%, marking its most significant first-half drop since the early 1970s, attributed to U.S. tariff policy. Currently, despite the diminishing likelihood of a prolonged ceasefire in the Iran conflict leading to lower energy prices and inflation concerns, a robust U.S. economy driven by advancements in AI suggests that investors are still expecting the next interest rate movement to be upward rather than downward. This strengthens the dollar, which has already been elevated by geopolitical tension.

A hawkish stance from new Federal Reserve Chair Kevin Warsh maintains attention on inflation, which continues to exceed the Fed’s 2% target. Market participants anticipate at least one interest rate increase this year, with a balanced probability of a second hike, a shift from the previous stance of no changes just a few weeks prior. No surprise the dollar is at 40-year highs against the yen, alarming Japanese officials, and near year-highs versus the euro. Purchasing American products comes at a higher cost; however, this might not dissuade consumers, stated Stephen Jen. “The strong dollar is not welcomed by anyone in ​the world, including the United States,” he said. “But U.S. companies, and being in the U.S., are just too valuable (or) attractive. Foreign companies are investing heavily in the U.S. to have a foothold and that is also holding up the dollar.” Policymakers from Auckland to Zurich are facing challenges with depreciating currencies, potentially leading to increased national import expenses. Energy prices have decreased; however, the expenses associated with food, travel, and various goods and services have all risen significantly.

South Korea’s won has reached unprecedented lows, contributing to an overheated stock market and raising concerns among regulators. Emerging markets like India have bolstered their currencies or increased interest rates to counteract the strength of the dollar. Investors have significantly increased their positions on sustained dollar strength at an unprecedented rate for the first half of the year, as indicated by data from the Commodity Futures Trading Commission. Speculators currently maintain a net long position valued at approximately $30 billion, marking the highest level since the commencement of Donald Trump’s second term in office. The speed at which these holdings have been accumulated, reflecting a net increase of $37 billion, marks the quickest growth for the first half of the year since the inception of CFTC records in 2012. “I certainly think in the near term, the risk is that you get a stronger dollar because of this increase to real rates in the U.S.,” Joseph Purtell said.  “Can we break out of this range that we sort of held over (the ​last) six- to nine-month period? I think ​it’s likely.” His firm’s perspective was that, in the long run, the dollar would depreciate due to structural issues like the sustainability of U.S. government finances, he noted. U.S. economic data has consistently provided positive surprises since April, while earnings growth has surpassed expectations.

Morgan Stanley indicated in a note that the potential for the euro to decline to $1.10 in the near term cannot be overlooked, particularly if markets persist in pricing a hawkish Federal Reserve. It is currently valued at approximately $1.135. AI mania and trillion-dollar IPOs have pulled in record amounts of cash, starting with SpaceX. BofA estimates an unprecedented $341 billion has flowed into U.S. equities so far this year, up from a year-to-date total of $134 billion this time last year. The United States hosts hyperscalers eager to establish data centres for the AI expansion, alongside major quantum computing firms, reinforcing the argument for a stronger dollar for certain investors. A robust economy is accompanied by a robust currency, stated Mabrouk Chetouane. “If we think that growth tomorrow is a combination of calculation capacities, energy, and to some extent, labour, which country and which geography is in the best position to benefit from this ​environment?” he said. “It’s the United States – the winner takes it all.”