The US dollar enters the second half of 2026 with renewed momentum as higher Treasury yields, continued inflation and expectations of continued Federal Reserve tightening encourage investors to extend positions. Currency strategists still widely expect the rally to end, but a growing minority believe the greenback could remain strong for a long time.
The dollar rose nearly 4% from May’s lows after easing global fears sent oil prices down from their wartime highs while US economic data remained strong. It ended the first half as the strongest performing currency, gaining nearly 3%, while speculative investors amassed their largest long dollar position since January 2025.
The immediate argument for more appreciation hinges on interest rate expectations. The Federal Reserve kept its target range at 3.5% to 3.75% in June, but said inflation remained above its 2% target and economic activity continued to grow at a strong pace. Futures markets later moved to prices that almost doubled before the end of 2026, extending the expected return on dollar assets.
Bank of America is among the top ranking institutions. Its currency team expects three Federal Reserve rate hikes this year and sees scope for a dollar hike for at least a third quarter. Citigroup also identified the possibility of the euro falling to $1.11 if inflation remains strong and markets call for a more aggressive US policy approach.
Those predictions run counter to the broad consensus. Median projections from surveys conducted between June 26 and July 1 put the euro at $1.16 by the end of September, $1.17 by the end of 2026 and $1.18 within a year. The outlook assumes that soft energy prices will reduce inflationary pressure, allowing for expected US rate hikes to ease and bring back potential cuts through 2027.
Belief in that weak dollar situation is no longer as strong as it was at the beginning of the year. Twenty-three out of 70 economists expected the euro to remain flat or depreciate against the dollar over the next three months. Among the small group asked about investor positions, 29 of 41 expected existing net dollar positions to be maintained or increased by the end of July.
The policy comparison goes beyond the euro. The European Central Bank raised rates in June but is expected to increase by only one rate this year, and the Federal Reserve’s stance has shifted sharply to manage renewed inflationary pressure. Any widening between the expected rates of the US and the eurozone will strengthen the financial incentive to hold dollars.
Japan presents an even greater test. The yen fell to 163 per dollar, its weakest level in four decades, increasing the risk that Japanese authorities will intervene to limit the decline. Analysts however expect a gradual recovery of the yen, forecasting levels of around 159 per dollar by the end of September, 156 by the end of the year and 154 within 12 months as the Bank of Japan continues to tighten policy.
The dollar’s direction will now depend on whether interest rate expectations or long-term valuation concerns prove long-term. Strong employment, inflation or consumer data will support a bullish position by encouraging further tightening by the Federal Reserve. Softer figures could offset some of the rate hikes currently showing in bond and coin markets.
Segregation has practical consequences for financial costs, international wages and capital protection. Companies that anticipate a strong dollar decline may face higher conversion costs and weaker US reported earnings if the rebound continues, while dollar-based businesses could see foreign earnings reduced when translated into their reporting income. The next round of inflation and labor market data will clarify whether the dollar’s first quarter strength represents a temporary repricing or a sustained change in the global rate cycle.
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