The Dollar Index (DXY) is on track to close the week with a 0.6% gain, recovering steadily from its three-year low reached earlier this month. On Thursday, the index quoted at 97.47, registering a 0.15% daily rise as investor sentiment shifted in favor of the greenback. The dollar’s turnaround comes in the wake of multiple macroeconomic developments, most notably a fresh wave of U.S. tariffs and strong labor market data that have together restored confidence in the American economy.
The index, which measures the dollar’s strength against a basket of six major world currencies, had been under pressure for most of the first half of July due to heightened expectations of interest rate cuts from the Federal Reserve. However, recent policy developments and data prints are forcing traders to rethink their assumptions.
Key Catalysts Behind the Dollar’s Revival
1. New Tariffs by President Trump
Earlier this week, U.S. President Donald Trump announced a new series of import tariffs targeting specific industrial and consumer goods. These protectionist measures, aimed at reducing the country’s trade deficit, have stoked concerns of inflation due to rising import costs.
The anticipation that inflation could rise—at least in the short term—has led markets to dial back expectations of a near-term interest rate cut by the Federal Reserve. Instead, analysts now believe the Fed may adopt a wait-and-watch approach, possibly delaying any monetary easing until 2026.
The policy shift, although not yet official, strengthens the U.S. dollar. Higher interest rates, or even the absence of rate cuts, tend to attract foreign capital as returns on dollar-denominated assets become more appealing.
2. Strong U.S. Labor Market
Adding fuel to the dollar’s rally, data from the U.S. Department of Labor revealed a decline in the number of Americans filing for unemployment benefits. Initial jobless claims fell below analyst expectations and last week’s print, reinforcing the notion of a resilient economy.
Labor market health is a crucial determinant for Federal Reserve policy. A strong jobs market, combined with inflationary pressure from tariffs, reduces the urgency for the Fed to intervene with rate cuts. This dual support—solid employment and prospective inflation—has created a tailwind for the greenback.
Performance of Basket Currencies
The Dollar Index compares the USD against six major global currencies: the Euro (EUR), British Pound (GBP), Japanese Yen (JPY), Canadian Dollar (CAD), Swiss Franc (CHF), and Swedish Krona (SEK).
Here’s how the major pairs are performing in sync with dollar strength:
| Currency Pair | Current Quote | Daily Change | Weekly Trend |
|---|---|---|---|
| EUR/USD | 1.1732 | -0.10% | Weakening |
| GBP/USD | 1.3568 | -0.10% | Weakening |
| USD/JPY | 143.85 | +0.20% | Strengthening |
| USD/CAD | 1.3284 | +0.12% | Neutral |
The EUR/USD and GBP/USD pairs are both down 0.1%, echoing the DXY’s rise. The euro has come under pressure due to weak industrial output data from Germany, while the pound is weighed by political uncertainty in the UK over trade and fiscal policy.
Broader Macroeconomic Picture
1. Inflation Expectations
Tariffs usually have a pass-through effect, causing price hikes across the supply chain. The Consumer Price Index (CPI) and Producer Price Index (PPI) will be closely watched in the coming weeks to assess if inflation picks up meaningfully.
Markets now believe that higher inflation could prevent the Fed from slashing rates, especially if wage growth remains strong and consumer spending holds up.
2. Federal Reserve Policy Shift?
Until last week, the CME FedWatch Tool showed over 70% probability of a rate cut in the September 2025 FOMC meeting. That figure has now dropped to 42%, according to the latest derivatives pricing.
Fed Chair Jerome Powell has emphasized the need for “data-driven” decisions. Should job creation remain strong and inflation continue creeping upward, the Fed may pause monetary easing altogether, lifting the dollar further.
Global Repercussions of a Stronger Dollar
A strengthening dollar has global ramifications—especially for emerging markets and commodity prices. Here’s how:
a. Emerging Markets (EM)
EM countries with significant dollar-denominated debt could see debt servicing costs rise, potentially pressuring local currencies. Investors might rotate out of EM assets in favor of U.S. treasuries and equities, creating capital flight scenarios.
b. Commodities
Commodities like oil, gold, and copper, which are priced in dollars, typically fall as the dollar strengthens. This week, gold prices dropped 0.4%, while Brent crude was down 1.2%, both reflecting costlier greenbacks.
Technical Outlook on the Dollar Index
From a technical analysis standpoint, the DXY has bounced off strong support near 96.70, forming a bullish engulfing pattern on the daily chart—a potential reversal indicator.
Key Technical Levels:
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Immediate Resistance: 97.60
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Major Resistance: 98.30 (June high)
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Immediate Support: 96.85
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Major Support: 96.30
Momentum indicators like RSI (Relative Strength Index) have risen to 54, signaling neutral-to-bullish momentum. If the index closes above 97.60 this week, it could set the stage for a retest of the June highs near 98.30.
Market Sentiment and Trader Positioning
Sentiment in the forex futures market has shifted dramatically. According to the latest Commitment of Traders (COT) report from the Commodity Futures Trading Commission (CFTC):
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Net long positions in USD have increased by 18% week-on-week.
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Traders have trimmed euro and pound exposures.
Retail investor data also indicates that over 62% of small traders are now net short on EUR/USD, indicating a contrarian bullish sentiment for the dollar.
Economic Events to Watch Next Week
The coming week will be crucial for dollar watchers. Important economic indicators include:
| Date | Event | Expected Impact |
|---|---|---|
| July 15 | U.S. Retail Sales (MoM) | Medium |
| July 16 | Fed Beige Book | High |
| July 17 | U.S. Initial Jobless Claims | High |
| July 18 | University of Michigan Sentiment | Medium |
| July 19 | Eurozone CPI Final | Medium |
Positive surprises in U.S. retail data or labor indicators could further solidify the dollar’s rebound trajectory.
Expert Commentary
Jane Wu, Chief FX Strategist at Orion Markets, said:
“The dollar is doing what it does best—responding to geopolitical tension and domestic strength. As long as tariffs persist and rate cuts remain uncertain, expect continued resilience.”
Haruto Yamazaki, Macro Analyst at Tokyo FX Exchange, added:
“The yen is weakening versus the dollar, despite global risk-off signals. That says a lot about the conviction behind the dollar rebound.”
Conclusion: Dollar Strength May Be Here to Stay
After weeks of decline, the Dollar Index is now back in bullish territory, buoyed by new U.S. tariffs, strong labor market data, and dwindling chances of a Fed rate cut this year. The index’s 97.47 mark and its 0.6% weekly gain signify that investor sentiment has turned in favor of the greenback.
With global uncertainty, policy recalibrations, and market recalculations all converging, the dollar may continue to attract safe-haven flows. The coming weeks—with key economic data and Fed commentary—will be critical in confirming whether this is a short-term bounce or the beginning of a longer bullish phase.
🔗 Visit Official Website for U.S. Labor Data: U.S. Department of Labor
3 Key Takeaways
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The Dollar Index rose to 97.47, up 0.6% for the week, rebounding from a 3-year low.
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New tariffs and strong job data reduce chances of near-term Fed rate cuts.
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EUR/USD and GBP/USD declined in tune with the dollar’s renewed strength.
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