US dollar rallies to 5-week high as bond markets steady ahead of data release

The dollar climbed to its highest level in over five weeks on Tuesday, as traders across global currency markets repositioned ahead of a packed week of U.S. economic reports.

The Bloomberg Dollar Spot Index rose 0.3%, reaching its strongest level since June 23, according to Bloomberg. That gain came as the greenback advanced against every Group-of-10 currency, with the euro suffering the most losses.

European currencies dropped after the European Union finalized a trade agreement with the United States on Sunday. The deal, instead of easing fears, intensified concerns over how it could affect the EU’s economic outlook. The euro fell to its weakest level in more than a month, adding to the momentum behind the greenback.

Yields slide as Fed holds rates steady

U.S. Treasury yields slipped early Tuesday ahead of the Federal Reserve’s policy meeting. As of press time, the 10-year yield has dropped 1.6 basis points to 4.404%. The 30-year yield moved lower by 2.1 basis points to 4.944%, while the 2-year barely moved, sitting at 3.92%.

Bond prices and yields move in opposite directions. Traders in the fed funds futures market have priced in a 97% chance that the Fed will hold rates steady at 4.25% to 4.5%, as measured by the CME FedWatch tool. The Fed begins its two-day meeting Tuesday, with a decision expected Wednesday.

Ed Yardeni, president of Yardeni Research, said, “Odds are that it will be a non-event.” He added that the only thing worth watching is whether the FOMC keeps repeating the line: “We are in no rush to lower interest rates,” or gives any hint of changing course.

David Kohl, chief economist at Julius Baer, echoed that. He doesn’t expect any rate cuts until September. “If there is more certainty that the tariff-driven inflation spike is only transitory,” David said, “the Fed will be able to adopt a neutral policy stance in 2026, with an additional two rate cuts of 25 basis points.”

Focus turns to inflation, labor data, and Trump’s tariffs

Markets are bracing for a string of U.S. data releases this week, which are expected to offer more signs that the economy remains strong. July’s consumer confidence data is due Tuesday, along with the JOLTS job openings report.

On Thursday, the personal consumption expenditures (PCE) index, the Fed’s preferred measure of inflation, will be released. Analysts expect the data to show annual inflation climbing from 2.3% to 2.4%, based on projections from FactSet.

The inflation numbers will also reflect the impact of tariffs, which have returned to the spotlight as President Donald Trump pushes his trade agenda. The recent deal between the EU and the U.S. wasn’t the only headline over the weekend. On Sunday, Commerce Secretary Howard Lutnick told reporters that a 90-day extension of the truce with China is likely.

That extension could slow down inflation fears if it prevents new tariffs from kicking in. Meanwhile, the greenback is recovering from losses seen earlier this month, as traders adjust to the reality of Trump’s trade moves. The added clarity from the administration appears to be easing some of the market’s hesitation.

Currency analysts say the dollar’s rally is being driven by a change in sentiment. “For now at least, the focus for FX market participants has moved away from the trade uncertainty and on to the resilience of the US economy,” said Derek Halpenny, head of research for global markets at MUFG. “That is clearly helping to prompt some short dollar position liquidation built up through the first half of the year.”

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