The dollar: don’t bet against the US

• The US economy is strong and outperforming its rivals.
• USDJPY could reach 170, as FX interventions are not a concern.

The US dollar has managed to recoup some of the losses incurred over the previous two days, thanks to a decline in global risk appetite and FOMC hawkish tilt. They are preparing to hike the rate if inflation does not continue to move towards the 2% target. Against the backdrop of the renewed escalation in the Middle East, this seems an unlikely prospect.

The growth in US retail sales in June, the eighth consecutive month of growth and the eleventh out of the last twelve, is a sign of the economy’s strength. According to Wells Fargo, if you bet against the American consumer, you will lose. This time, the improvement in demand was linked to falling gas and petrol prices; however, this factor is hardly a long-term trend. The resumption of conflict in the Middle East threatens to worsen the state of the retail sector soon.

However, the health of other global economies risks deteriorating even more rapidly. This is particularly true of those dependent on oil and gas, such as the eurozone. Traders may anticipate a tighter ECB monetary policy in 2026, but a slowdown in GDP will pose a peril for this plan. The interest rate differential with the Fed will remain wide, allowing Goldman Sachs to lower its forecast for the EURUSD to 1.12 from 1.18 in six months, and to 1.12 from 1.2 in 12 months.

The US dollar found support as global risk appetite weakened. A sell-off in Big Techs caused stock indices to retreat, and the escalation of the conflict in the Middle East boosted demand for the greenback as a safe-haven.

The strengthening of the US dollar allowed USDJPY to resume its rally. As a result, Sakuki Katayama returned to verbal interventions. According to the finance minister, the government will take decisive action at any time if necessary. The comments came ahead of the weekend in Japan, allowing the country to take advantage of the thin market to intervene in the forex market.

According to Kshitij Consultancy Services, Bloomberg’s most accurate forecaster for the yen in the second quarter, currency interventions will not help. USDJPY is set to rise to 170 by 2027, as indicated by US and Japanese stock index performance, the interest rate differential between the Fed and the BoJ, and the CNHJPY exchange rate.

The FxPro Analyst Team