Dollar Rebounds as Trade Risks Ease, But Fed Policy Clouds Outlook

The U.S. dollar surged Monday after months of weakness driven by trade-war fears, yet analysts warn the rally may be short-lived. Standard Chartered notes that most trade-related optimism is already priced in, leaving Federal Reserve policy as the key driver for future moves.

Recent trade agreements with the EU, Japan, and emerging markets have eased investor anxiety and buoyed the dollar. However, strategists highlight that any further weakness is likely to stem from the Fed cutting rates faster than markets anticipate rather than additional trade relief.

Attention now turns to upcoming Federal Open Market Committee (FOMC) meetings. While no major policy shift is expected at the July meeting, markets are pricing in potential rate cuts by September. Fed Chair Jerome Powell’s tone will be critical, as he has previously indicated that rate cuts were only delayed due to tariff-driven inflation uncertainty.

The divide between hawkish and dovish Fed members has narrowed, focusing largely on differing views of tariffs’ impact on inflation. Doves like Governor Waller argue for looking past temporary price jumps, while Powell has hinted that absent tariffs, easing could already be underway.

Key economic data, particularly the next U.S. jobs report, could further sway expectations. Standard Chartered warns of significant downside risk versus the consensus 109,000 forecast, with weak payroll numbers potentially accelerating Fed easing bets and pressuring the dollar lower.

Despite these risks, the bank expects only modest dollar softness in the coming months, citing underlying resilience. A larger drop, they argue, would require a decisive Fed pivot rather than additional trade headlines, keeping markets focused on central bank signals rather than geopolitical developments.