Dollar regains strength amid Fed uncertainty and Trump's anti-BRICS push

US retail sales and jobless claims were better than expected on July 17. That offers more support for a hawkish rethink of the Federal Reserve's rate cuts. With the dollar gaining on bets of the Fed being on the sidelines, the real question is: can the dollar's rebound gather some pace?

The dollar index marked a second consecutive week of gains, having rallied over 2 per cent since the July 1st low. The recent gains are modest at best when compared to the steep losses in the first half of 2025.

However, the dollar has realigned with core macro drivers and notably re-established its positive correlation with 10-year yields. Key bets are that this dollar return ‘functionality’ reduces the likelihood of new selloffs - unless trump fires Fed Chair Jerome Powell. That was reflected in Wednesday’s brief dollar collapse.

So far, incoming data, including inflation, backs a delayed fed rate cut view. Without Trump’s relentless pressure, the September Fed rate cut bet wouldn’t even be on the table. Still, anecdotal evidence points to higher dollar hedging activity, which has contributed to keeping the greenback weak.

Data showed $311 billion worth of net capital inflows in May, reversing a very modest $14 billion outflow in April. This suggests foreign investors have not lost confidence in dollar-denominated assets yet.

Can the US maintain dollar dominance?

This comes as Trump reiterated his attack on BRICS as he defended the dollar's dominance. Trump pledged to never allow the creation of a central bank digital currency in the United States.

He said, "The reserve currency is so important. You know, if we lost that it would be like losing a world war. We can never let anyone play games with us, and that's why, when I heard about this group from BRICS, six countries basically. I hit them very, very hard. If they ever form, if they ever really formed in a meaningful way, it would end very quickly. I will tell you that. They will be gone very long, I don't even think they will do it. They're virtually afraid of me. I also remain fully committed to my pledge never to allow the creation of a central bank digital currency in America; it won't happen."

The dollar slipped a touch on Friday as Fed Governor Waller backed a July interest-rate cut to support a softening labour market.

But that message failed to catch on in money markets, with swaps pricing less than a 60 per cent chance of a quarter-point cut in September. The futures market assigns no probability to easing this month.

Elsewhere, Japan’s election on Sunday might trigger a break above 150.0 in the yen against the dollar. The renewed interest in the dollar is at play, unless Trump reiterates his tariff rhetoric.