Growing fiscal risks, softer economic data and uncertainty over Federal Reserve policy could intensify pressure on the U.S. dollar, despite recent strength, according to currency strategists.
Higher U.S. bond yields have helped support the dollar in 2026 by attracting more capital inflows into dollar assets.
The U.S. Dollar Index tracks the performance of the greenback against six major global currencies, including the euro, the pound, the Swiss franc, the Japanese yen and the Canadian dollar. The benchmark is up 1.15% year-to-date, notching a 52-week high of 101.80 on June 24. The index registered at 99.4 as of 5:32 a.m. ET on Wednesday.
Charu Chanana, chief investment strategist at Saxo, said higher Treasury yields do not necessarily support the dollar if investors believe the increase reflects fiscal risk, heavier government borrowing or persistent inflation, rather than stronger U.S. growth or tighter Fed policy, said.
The historic relationship between Treasury yields and dollar strength "still matters," Chanana added, but "investors should increasingly ask why U.S. yields are rising."
"A higher yield generated by stronger economic fundamentals is not necessarily equivalent to a higher yield generated by a larger risk premium. That distinction may help explain why higher Treasury yields have recently coexisted with less convincing dollar strength."
Global bonds sold off this week, with the U.S. 30-year Treasury yield reaching its highest level since 2007. Chanana said any breakdown in the relationship could herald broader portfolio consequences.
"For international investors, U.S. assets have benefited for years from both strong underlying returns and a strong dollar. If that relationship becomes less consistent, geographical diversification may matter more."
Softer U.S. consumption, inflation and employment data have caused investors to reassess expectations for interest rates, and reduce some bullish dollar positions, according to Societe Generale.
The U.S. economy had shown resilience since the start of the Middle East conflict, with Fed rate pricing underpinning the dollar, said Kit Juckes, chief FX strategist at SocGen.
In a note, Juckes said recent weaker inflation and employment prints have since reduced market expectations for higher U.S. rates.
"Long dollar positions are now being cut back in a thin summer market, as the fundamental justification for holding them fades," he said, adding that could potentially drive the dollar index lower, or leave it drifting into an "uninspiring" 95–100 range for the rest of the year.
George Saravelos, global head of FX research at Deutsche Bank, said uncertainty about the Fed's inflation reaction function adds another potential negative for the dollar.
He highlighted "mixed signals" from Federal Reserve Chair Kevin Warsh over the central bank's inflation target and toolkit, adding he views the ambiguity ultimately as dollar-negative.
"We have not boarded the dollar bullish train this year because global growth has been resilient, geopolitical developments pose continuous challenges to dollar dominance and the Fed has been ambivalent on its reaction function to inflation," Saravelos said.
In a note on the recent historic U.S.-Japan intervention to support the yen, Saravelos also argued that the Fed's "FIMA" facility ultimately has the same economic impact as quantitative easing.
The Fed's FIMA repo facility allows approved foreign central banks and other monetary authorities to temporarily exchange U.S. Treasury securities for dollars.
"When a foreign government posts treasuries as collateral for cash the Fed prints dollars," Saravelos said. "If the Fed was to sharply increase the size of the FIMA facility in line with the U.S. administration request, we would consider it as an indirect way of Fed monetary financing of UST and an additional dollar negative."
Meanwhile, Elias Haddad, vice president, global head of markets strategy, foreign exchange at BBH, said that a stock market correction may be less of a dollar risk, adding that foreign investors may not abandon dollar assets altogether.
BBH analysis of Treasury data shows foreign purchases of U.S. stocks hit $920 billion in the 12-month period to June, more than triple that for Treasuries, which stood at $294 billion.
"This has led some to argue that the dollar is increasingly vulnerable to an equity market correction, as foreign investors unwind their U.S. stock holdings. We disagree," Haddad said in a note Tuesday. He said a broad stock market sell-off may encourage foreign investors to instead rotate back into safe-haven Treasuries, which he said still underpins the dollar's defensive appeal.
