The Dollar Is Having a Sunny July. What’s Behind the Latest Gains.

This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.

Dollar Shows Some Muscle

FX Daily
ING
July 18: The dollar index is on track for a second consecutive week of gains, having rallied over 2% since the July 1 low of 96.50. While modest compared to the steep losses in the first half of 2025, the dollar has realigned with core macro drivers and notably re-established its positive correlation with 10-year yields.

One of our key calls this summer is that this return to dollar “functionality” reduces the likelihood of new selloffs—unless President Trump fires Federal Reserve Chair Jay Powell or escalates protectionism beyond markets’ current tolerance, particularly against China. We don’t expect either, and see some dollar support in the coming months.

So far, incoming data back our view. Without Trump’s relentless pressure and the dovish dissent from [Federal Reserve governors] Christopher Waller and Michelle Bowman, [a September interest-rate cut] likely wouldn’t be on the table. Yesterday, we heard from Waller that the Fed should cut rates at the July meeting due to the weakening labor market, while on the data side, retail sales came in strong and initial jobless claims continued to cool.

Another surprise: TIC [Treasury International Capital System] data showed $311 billion net capital inflows in May, following a modest $14 billion outflow in April. This suggests foreign investors have not lost confidence in dollar-denominated assets.

Francesco Pesole

America Keeps Shopping

AM Charts
BMO Capital Markets
July 17: The June retail sales report topped expectations, rising 0.6% amid broad strength. The sales measure that feeds into estimates of personal spending rose 0.5% and remains on a steady upward track, rising 5% in the first half of the year from the same period a year ago. Moreover, nearly all of the increase is in volumes, as core goods consumer prices were mostly flat. Low unemployment, little tariff passthrough into inflation, and the rollicking equity market recovery have all helped, along with some possible front-loading ahead of tariffs. While real personal spending has downshifted a bit this year, it remains healthy at up 2.2% year over year in May. One more reason for the Fed to remain patient,

Sal Guatieri

Will the Bond Market Crash?

Article
Ahead of the Herd
July 17: The bond vigilantes are real, and they wield enormous power. The global bond market is significantly larger than the global stock market, with a total value exceeding $140 trillion.

When Britain’s neophyte Prime Minister Liz Truss published a mini budget that made unfunded tax cuts and raised the amount borrowed, the bond vigilantes sold U.K. gilts en masse, sank the pound, and forced Truss to resign.

Could the same thing happen in the U.S.? Quite possibly, if the United States continues to rack up debt and reduce revenues through tax cuts.

Indeed, a U.S. bond market crash seems inevitable, especially as inflation rises amid Trump’s inflationary tariffs on imports, leading to a standoff between Trump and Powell over interest rates.

If it [crashes], the last safe havens standing are commodities and precious metals.

Richard Mills

Money Supply Is Surging

Third Quarter Strategic Income Outlook
Osterweis Capital Management
July 15: While explanations for muted markets are numerous and an exercise in speculation, we see two potential drivers. First, the financial markets continue to be awash in liquidity. As we have discussed previously, money supply as measured by M2 stands at an all-time high. It jumped 4.5% year over year in May, marking its 19th consecutive monthly increase. It has now surpassed the previous all-time high of $21.86 trillion, posted in March 2022. Since 2020, the M2 money supply has risen nearly $7 trillion, or ~45%. One definition of inflation is more money chasing fewer goods. There is certainly more money chasing financial assets today.

Another source of liquidity for financial assets is the Federal Reserve balance sheet. While the Fed’s efforts have reduced the balance sheet through the roll-off of Treasury and mortgage-backed securities, its balance sheet remains significantly elevated compared to prepandemic levels.

Carl Kaufman, Bradley Kane, Craig Manchuck, and John Sheehan

CPI: No Tariff Alarm

U.S. Watch—Chart Story
TS Lombard
July 15: The June consumer price index print provides little fodder for those fretting about tariffs, with a 0.2% rise month to month in core CPI, following a 0.1% rise in May, and below consensus of 0.3%. Dropping autos prices, however, are masking the beginnings of some tariff inflation elsewhere—household furnishings and supplies and apparel are starting to show some warmth. Nothing in this print prevents the Federal Reserve from cutting interest rates in September, but if inflation pops next month, bets for a September cut are off; otherwise, it’s gradual cuts from September.

Freya Beamish, Alexandros Xenofontos

Microcap Rally Bodes Well

A Charts Consult
Paulsen Perspectives
paulsenperspectives@substack.com
July 14: It takes confidence to buy small-cap stocks. If investors are worried about future economic conditions, they are likely to stick with the conservative and safer large-cap alternative. This is why it’s interesting that recently the relative price of microcap stocks has been breaking higher, leaving small-caps behind….What are microcap investors seeing that is not yet evident to small-cap investors? I don’t know. But perhaps leadership is finally starting to shift away from large-caps truly from the “bottom-up”?

Jim Paulsen

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