Hawkish rhetoric from the Federal Reserve has proven insufficient to support the US currency amidst a soaring equity market rally and shifting geopolitical dynamics. Coordinated currency interventions by the US and Japan aimed at bolstering the yen have evoked memories of the 1985 Plaza Accord, which triggered a massive devaluation of the dollar. This time, the decline of the USD index has been accelerated by the rapid unwinding of record net-long positions in the American currency, levels not seen since 2015. This turbulence has resulted in heightened volatility for the EUR/USD pair.
The end of July was marked by significant uncertainty. The stance of three dissenting FOMC members has led investors to doubt Chairman Kevin Warsh’s ability to indefinitely delay the onset of the monetary tightening cycle. Despite the Chairman’s high status, he must contend with the views of his colleagues. Neel Kashkari, Beth Hammack, and Lorie Logan have consistently advocated for gradual, step-by-step rate hikes, warning of the destructive consequences that aggressive monetary tightening would have on the real economy.
Richmond Fed President Thomas Barkin may be joining this coalition, having suggested the possibility of reversing the three rate-cut cycles implemented in late 2025 should inflation rebound. The paradox lies in the fact that, despite hawkish rhetoric and rising US Treasury yields, the US dollar concluded July with its worst monthly performance since April. This divergence between the bond market and the foreign exchange market signals waning confidence in the White House’s macroeconomic policy, drawing unwelcome parallels with the behavior of emerging market currencies.
An unexpected catalyst was the revelation of US participation in coordinated interventions with Japan to strengthen the yen. Donald Trump characterized this joint action as a “signal of friendship,” while Treasury Secretary Scott Bessent stated that US authorities are prepared to re-enter the foreign exchange market “without hesitation” if necessary. However, media reports conflict on the specifics: Nikkei reports the sale of US dollars, whereas the Financial Times indicates that New York banks sold euros.
Formally, such actions could be framed as supporting the US-declared “strong dollar” policy by stabilizing global markets. However, from an operational standpoint, this implies that US authorities will likely need to buy back EUR/USD in the future to replenish depleted currency reserves, creating an additional overhang of downward pressure on the dollar.
Further pressure on the greenback has been exerted by a rising risk appetite in equity markets and the Trump administration’s decision to halt strikes on Iran. The White House has expressed willingness to mediate negotiations with Tehran, but Iran’s exorbitant demands—including the imposition of transit fees through the Strait of Hormuz and the complete lifting of sanctions—cast serious doubt on the efficacy of this diplomatic process. Nevertheless, the mere fact of de-escalation has already begun to compress risk premiums: oil prices have started to correct, dragging the US dollar down alongside them.
