The dollar heads into the second half of 2026 on a high, thanks to bets for higher US interest rates and an unquenchable thirst for U.S. assets from investors chasing the “American exceptionalism” that may spell more pain for other currencies.
It is the best performing currency at the half-year point, up 3% and contrasts with a year ago, when it was nursing a fall of more than 10%, in its biggest first-half dive since the early 1970s, on U.S. tariff policy.
Now, even as the prospect of a lasting Iran war ceasefire reduces energy prices, and inflation risks, a strong U.S. economy powered by an AI boom means investors still anticipate the next move in rates to be up, not down.
This bolsters the dollar, already boosted by geopolitical tension.
A hawkish tone from new Federal Reserve Chair Kevin Warsh keeps the focus on inflation, which remains well above the Fed’s 2% target. Traders expect at least one rate hike this year and a 50/50 chance of a second, from no move a few weeks ago .
No surprise the dollar is at 40-year highs against the yen , alarming Japanese officials, and near year-highs versus the euro.
Buying American goods is more expensive, but that may not deter anyone, said Stephen Jen, chief executive and chief investment officer of Eurizon SLJ Asset Management.
“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 contending with weaker currencies, which could raise national import bills. Energy prices are down, but the cost of food, travel and other goods and services have all soared.
South Korea’s won has hit record lows, fuelling a frothy stock market and troubling regulators. Emerging markets such as India have propped up their currencies, or jacked up rates to ward off dollar strength.
BULLISH BUILDUP
Investors have loaded up on bets on continued dollar strength at their fastest pace on record for the first half of the year, Commodity Futures Trading Commission data shows.
Speculators hold a net long position worth around $30 billion, the largest since the start of Donald Trump’s second presidency.
The pace at which they have amassed these holdings, a net rise of $37 billion, is the fastest for the first half of the year since CFTC records began 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.,” Neuberger portfolio manager 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 view was that over the longer term the dollar would weaken, given structural concerns such as the sustainability of U.S. government finances, he added.
RECORD INFLOWS
U.S. economic data has delivered almost non-stop positive surprises since April, while earnings growth has exceeded expectations.
Morgan Stanley said in a note the risk of the euro falling to $1.10 near-term could not be ignored, if markets continue to price in a hawkish Fed. It is trading around $1.135.
AI mania and trillion-dollar IPOs meanwhile, starting with SpaceX, have pulled in record amounts of cash.
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 is home to the hyperscalers rushing to build data centres for the AI buildout, as well as some of the biggest quantum computing companies, bolstering the case for a stronger dollar for some investors.
A strong economy goes with a strong currency, said Mabrouk Chetouane, global head of market strategy at Natixis Investment Management.
“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.”