The U.S. dollar has rallied in recent weeks, but a majority of foreign exchange strategists polled between June 26 and July 1 expect that rebound to be temporary. Respondents to the Reuters survey cited cooler oil prices and the prospect of reduced inflation pressures as key forces that will dampen the dollar over the coming months. At the same time, a substantial minority of specialists and existing market positioning argue the recent strength could persist in the near term.
Market dynamics have pushed the greenback roughly 4% higher from May's low after a brief respite in fighting between the U.S. and Israel with Iran. That reduction in geopolitical risk helped send crude oil back to levels prevailing before the conflict, and long-dollar positions rose to their strongest point since January 2025, according to Commodity Futures Trading Commission data cited in the poll.
Conventional fundamentals have also supported the dollar. U.S. inflation remains above target, the economy has shown resilience, Treasury yields are elevated and in June nearly half of Federal Reserve policymakers signaled they expect rates to rise this year. Consistent with those signals, interest rate futures were pricing in almost two rate increases by the end of the year.
Despite market pricing that implies further Fed tightening, strategists who responded to the Reuters poll largely maintained a longer-held view that the dollar will lose ground over time. Poll medians showed the euro strengthening to $1.16 by the end of September, moving to $1.17 at year-end and $1.18 one year out.
Speaking in the survey, Jane Foley, head of FX strategy at Rabobank, said her team remains more dovish than market pricing on the Fed. "There’s the possibility the Fed could end up cutting interest rates in 2027, so we’re more dovish than the market on the Fed. Those hikes getting priced out would weigh against the dollar," Foley said, while predicting a choppy trading range in the weeks ahead.
Distribution of views and near-term positioning
The poll revealed a clear split between the prevailing weaker-dollar expectation and a growing cohort of strategists seeing limited declines or even gains, at least for now. Of 41 respondents tracking positioning, 29 — or 71% — said existing net-long dollar positions would either hold or increase by the end of July. The remaining respondents anticipated a decline in net-longs, and none expected a flip to a net-short stance by that date.
Other measures of conviction also showed rising skepticism about an immediate euro rally. Roughly one-third of strategists surveyed — 23 of 70 respondents — expected euro-dollar to be unchanged or to slip over the next three months, up from about 20% in June's poll.
Bank of America FX strategist Alex Cohen said his team had revised forecasts to reflect more dollar strength through at least the third quarter and projected three Fed rate hikes this year. "The way (Fed Chair Kevin) Warsh articulated things on the inflation front was a clear bullish-dollar signal in our view...and the data supports that. We’re looking for a much more hawkish outcome from the Fed relative to many other G10 central banks," Cohen said.
Citibank’s head of G10 FX strategy, Dan Tobon, struck a similarly cautious tone for the euro, warning there is a significant chance it could fall toward $1.11 in coming months - a level more than 4% below the poll median. Tobon cautioned that upside surprises in inflation or other data would likely produce further hawkish repricing in favor of a stronger dollar, while weaker data would not automatically erase the hawkish positioning already built into markets.
Spotlight on the yen
A stronger dollar has exerted particular pressure on the Japanese yen. The currency fell to a 40-year low earlier in the week covered by the poll and has since softened further to around 163 per dollar, a level that has increased the risk of some form of official intervention.
Even so, strategists on balance retained a forecast for a gradual yen recovery over the coming year. The poll median for the yen showed a move to approximately 159 per dollar by end-September, 156 by year-end and 154 in one year. That outlook is grounded in the view that elevated inflation could prompt the Bank of Japan to follow its recent policy tightening with additional rate increases.
The results underscore a tug-of-war in currency markets: fundamental and positioning support for continued dollar strength in the short run versus a median forecast from strategists for a weaker dollar as energy prices and inflation pressures abate.
Summary
Most FX strategists in the Reuters poll expect the U.S. dollar's rebound to fade as oil prices cool and inflation pressures ease, but a significant minority and current net-long market positioning point to sustained dollar strength, at least through July.
- Key points:
- The greenback rose about 4% from May's low after a pause in U.S.-Israeli-Iran hostilities and oil retraced to pre-war levels.
- Poll medians show the euro gaining to $1.16 by end-September and $1.18 in a year; the yen is expected to recover gradually from near 163/$ to about 154/$ in a year.
- Positioning remains tilted toward the dollar in the near term, with 71% of respondents expecting net-long positions to hold or increase through July.
- Risks and uncertainties:
- Inflation upside: Stronger-than-expected inflation data could trigger further hawkish repricing and push the dollar higher, affecting currency and bond markets.
- Yen volatility and intervention risk: The yen's fall to around 163/$ raises the prospect of official intervention, which could alter FX dynamics abruptly.
- Positioning concentration: Heavy net-long dollar bets could amplify moves in either direction if market sentiment shifts.
Note: This piece reflects the findings and quotes reported in the June 26-July 1 Reuters poll and uses the data and commentary provided by respondents in that survey.