The US dollar is entering the second half of 2026 with renewed momentum as higher Treasury yields, persistent inflation and expectations of further Federal Reserve tightening encourage investors to extend bullish positions. Currency strategists still broadly expect the rebound to fade, but a growing minority believes the greenback could remain stronger for longer.
The dollar rose about 4% from its May low after easing geopolitical fears brought oil prices down from their wartime highs while US economic data remained resilient. It finished the first half as the strongest-performing major currency, gaining approximately 3%, while speculative investors accumulated their largest net-long dollar position since January 2025.
The immediate argument for further appreciation rests on interest-rate expectations. The Federal Reserve held its target range at 3.5% to 3.75% in June, but said inflation remained above its 2% objective and economic activity continued to expand at a solid pace. Futures markets subsequently moved towards pricing almost two rate increases before the end of 2026, widening the expected return advantage of dollar-denominated assets.
Bank of America is among the institutions taking a more bullish position. Its currency team expects three Federal Reserve rate increases this year and sees scope for additional dollar appreciation through at least the third quarter. Citigroup has also identified the possibility of the euro falling towards $1.11 if inflation remains firm and markets price a more aggressive US policy path.
Those forecasts contrast with the wider consensus. Median projections from a survey conducted between June 26 and July 1 put the euro at $1.16 by the end of September, $1.17 at the end of 2026 and $1.18 within a year. The outlook assumes that softer energy prices will reduce inflation pressure, allowing expectations of US rate increases to ease and bringing possible cuts back into consideration during 2027.
Conviction in that weaker-dollar scenario is no longer as strong as it was earlier in the year. Twenty-three of 70 strategists expected the euro either to remain broadly unchanged or decline against the dollar over the next three months. Among a smaller group questioned about investor positioning, 29 of 41 expected existing net-long dollar positions to be maintained or increased by the end of July.
The policy comparison extends beyond the euro. The European Central Bank raised rates in June but is expected to deliver only one additional increase this year, while the Federal Reserve’s stance has shifted more decisively towards controlling renewed inflation pressure. Any widening between expected US and eurozone rates would strengthen the financial incentive to hold dollars.
Japan presents an even bigger test. The yen has fallen towards 163 per dollar, its weakest level in four decades, increasing the risk that Japanese authorities intervene to slow the decline. Strategists nevertheless expect a gradual yen recovery, forecasting levels of around 159 per dollar by the end of September, 156 at year-end and 154 within 12 months as the Bank of Japan continues tightening policy.
The dollar’s direction will now depend on whether interest-rate expectations or longer-term valuation concerns prove more durable. Strong employment, inflation or consumer data would support the bullish position by encouraging further Federal Reserve tightening. Softer figures could remove some of the rate increases currently reflected in bond and currency markets.
The divide has practical consequences for funding costs, overseas earnings and currency hedging. Companies that assumed steady dollar depreciation may face higher conversion costs and weaker reported US revenues if the rebound persists, while dollar-based businesses could see foreign earnings reduced when translated into their reporting currency. The next round of inflation and labour-market data will determine whether the dollar’s first-half strength represents a temporary repricing or a more sustained change in the global rate cycle.