Interest Rate Hikes Not Enough to Stop Downtrend; Wall Street Bears on the Dollar for the Second Half

Since May, the Bloomberg Dollar Spot Index has risen by 0.7% driven by expectations of Federal Reserve interest rate hikes. Although this marks the fourth monthly increase for the U.S. dollar since its weakening began in 2025, Wall Street institutions such as Morgan Stanley generally believe that this rebound is unsustainable. According to Bloomberg data, the consensus estimate on Wall Street expects the U.S. Dollar Index to decline by more than 1% in the third quarter, with the drop expected to expand to 2% in the fourth quarter.

Diminishing geopolitical risk aversion and overcrowding in asset positions are exerting dual pressures on the U.S. dollar. Since Trump announced a ceasefire agreement with Iran, the U.S. Dollar Index has consistently been under the critical technical pressure of the 200-day moving average. Wells Fargo Securities strategist Erik Nelson stated that the relative advantages of the U.S. economy and stock market have reached an extreme level in 25 years, and coupled with the crowded positions in artificial intelligence and semiconductor stocks, the U.S. dollar is being exposed to the risk of correction.

The narrowing interest rate differential is providing support for non-U.S. currencies. Morgan Stanley strategy director Matthew Hornbach believes that the future interest rate hikes by the European Central Bank and the Bank of Japan in the coming months will promote global policy convergence. Current market pricing indicates that the Federal Reserve is expected to raise rates by only 30 basis points by March 2027, while the European Central Bank is expected to raise rates by 60 basis points, and the Bank of England and the Bank of Japan are also expected to raise rates by about 40 basis points each.

The overall macroeconomic backdrop is gradually shifting to support a weakening U.S. dollar in a volatile manner. TD Securities USA strategist Howard Du pointed out that the market's confidence in the Federal Reserve repeating the aggressive tightening cycle from 2021 to 2023 has been shaken. The Federal Reserve finds it difficult to outpace other major central banks in terms of hawkishness, hence most institutions maintain a bearish stance on the U.S. dollar.