The USD was mixed against the G10 for most of July before selling off sharply in the final week, leaving the DXY roughly 1.6% lower month-to-date. The New Zealand dollar led the field, rallying 3.81% against the greenback, followed by the Japanese yen at +2.80%. The Australian dollar and sterling gained 1.74% and 1.72% respectively, while the Canadian dollar added 1.28%. The euro managed a 1.01% advance, and the Swiss franc barely budged at +0.09%. The late-month sell-off was less about a single weak data point than a broader loss of confidence in the dollar's policy support. As DoubleLine's Jeffrey Gundlach put it, "the market didn't buy what Chairman Warsh was selling." During Warsh's second press conference as Fed chair, the 30-year Treasury yield surged 10 basis points to 5.21%, its highest level in 19 years, while the 10-year climbed to 4.67% and the two-year actually fell four basis points. That bear steepening was the bond market's verdict: hawkish talk without a hike simply raises the inflation risk premium at the long end. Equities delivered their own verdict, with the Dow plunging 1,153 points, its worst day since April 2025.
Fed Rhetoric vs. DXY Technical Realities
The FOMC held the fed funds rate at 3.50–3.75% in July. Despite Chair Warsh asserting there is "no soft target" and three regional presidents dissenting in favour of an immediate hike, short-term rates fell as futures continued to price in minimal tightening of roughly 36 bp. Gundlach's read is straightforward: if Warsh is truly committed to getting inflation to 2%, holding rates steady while war-driven commodity prices keep climbing is inconsistent with that goal. The bond market is essentially calling that bluff. Warsh's signature move as chairman has been to strip out forward guidance and let markets do the tightening for him, "we're observing" the material tightening in real rates, he said, even though "we haven't done much in 42 days." But when Bloomberg's Michael McKee asked him directly, "What are you waiting for?" Warsh could only reply that the discussion was "the farthest thing from inertia." The market was unmoved.
The credibility problem runs deeper than rhetoric. Warsh's case for patience rests on AI-driven productivity gains, which he claims are keeping aggregate supply robust. Yet Barclays economists find no statistically significant link between industry-level AI adoption and productivity growth, while a Federal Reserve Board discussion paper this month concluded that micro-level gains are "not adding up in aggregate." Skanda Amarnath of Employ America went further, calling the productivity claims in the FOMC statement "factual inaccuracies" that "smell of potential politicking." When the Fed chair's own research division undermines his central argument, the market's scepticism is rational, not reactive.
Technically, the US dollar index suffered a decisive breakout failure after rejecting multi-year downtrend resistance at 101.92/98. It is now testing the pivotal 100.16/42 support zone, which is defined by the 2024 swing low, 2025 pivot points, and a key long-term channel line. A sustained weekly close below that zone would open the door to 99.41 and threaten the 52-week moving average near 98.95, increasing the risk that the 2026 uptrend is fully invalidated.
G10 Deep-Dive: Divergence in Motion
European Bloc: The ECB held all three key rates unchanged at its 22–23 July meeting, keeping the deposit facility rate at 2.25%. The preliminary July euro-area CPI flash came in at 2.9%, up from 1.9% before the Middle East war began. The eurozone grew by 0.2% in Q2 after stagnating in Q1, leaving year-over-year growth at 0.5%. Political risks are mounting: Marine Le Pen is leading opinion polls for next spring's French presidential election, Germany faces three state elections in September where the AfD could win its first state (Saxony-Anhalt), and speculation is building that Italy's Meloni will call national elections next April. The US has also threatened an investigation into the EU's $1 billion fine on Google.
Commodity Bloc: The NZD’s outperformance was driven by the RBNZ, which delivered a 25-basis-point hike on 8 July, lifting the OCR to 2.50%, its first increase in three years. Governor Breman made clear that further increases are likely, with projections pointing to a peak near 3.25%. The AUD recovered to finish near $0.7019, but the trade balance is deteriorating: the May deficit of A$3.02 billion was the largest monthly gap since 2015. Softer June and Q2 CPI saw the futures market downgrade the likelihood of another RBA hike this year to about 50%. The CAD tracked the recovery in Hormuz traffic, with USD/CAD pulling back to slightly below 1.4000. However, the US has threatened 50% tariffs on $20 billion of Canadian goods that could be implemented as early as 19 August. Prime Minister Carney's Liberal Party needs to win at least one of three byelections in late August to retain its slim majority. The Bank of Canada cut to 2.25% last October; the swaps market is pricing in about a 70% chance of a hike before year-end.
Safe Havens and Japan: The Japanese yen's 2.80% rally was the strongest of the major currencies. The 10-year JGB yield has risen by more than 70 basis points this year, well more than any other G10 country, yet the yen had continued to trend lower until late July. The yen is tracking US rates, not the BOJ. More structurally, Japanese investors have sold about JPY24.3 trillion (almost $153 billion) of foreign bonds this year after purchasing JPY10.1 trillion in the same period last year, a massive capital repatriation story. Preliminary indications suggest the BOJ intervened on 30 July to sell almost $53 billion, with reports that the Federal Reserve checked prices on behalf of the US Treasury. USD/JPY finished July below its 200-day moving average near ¥158 for the first time since last October. One-month implied vol jumped from 6.8% to 9.1%.
China and the De-dollarisation Backdrop
The Chinese yuan rose by about 0.5% in July and is up roughly 3.5% year-to-date. The PBOC gradually reduced the dollar's fix to a 3.5-year low of CNY6.7892 on 30 July. China's Q2 growth disappointed at 4.3% year-over-year, its slowest pace since the end of 2022. A pending Section 301 excess-capacity investigation could raise Chinese electronics tariffs by another 10 percentage points before year-end. The US and China are reportedly moving toward establishing investment and trade boards ahead of a likely visit by President Xi to the US in September.
On the reserve-accumulation front, the de-dollarisation narrative is gathering tangible momentum. IMF COFER data shows the dollar’s share of global reserves has slid from roughly 72% at the turn of the century to under 58% today. The World Gold Council’s 2026 survey found that 89% of central banks expect global gold reserves to increase over the next 12 months, and 74% see lower dollar holdings within global reserves over the next five years. China is leading by example: it imported 163 metric tons of gold in May, the largest monthly inflow in over two years, and the PBOC has continued to add to its official holdings. At the same time, Beijing banned retail paper gold products linked to the Shanghai Gold Exchange effective 24 July, forcing physical delivery or liquidation, a move that tilts domestic demand toward the physical metal and away from western paper markets. Yet the counter-narrative remains intact: foreign investors bought $1.43 trillion of US stocks and bonds last year, up from $1.2 trillion in 2024. De-dollarisation is a slope, not a cliff, but the angle is steepening.
Energy and Geopolitics
The tentative reopening of the Strait of Hormuz remains the key macro backdrop. Traffic has recovered to roughly 30–35% of pre-war levels, and Brent crude eased toward $82 per barrel by month-end. The partial ceasefire has taken some of the war premium out of oil, reducing terms-of-trade support for the petro-currencies. We suspect gradual normalisation is priced, but a sudden reversal remains the key tail risk for August.
What to Watch in August
1. US data and DXY technical inflection: The 100.16/42 zone is the line in the sand. A weekly close below it would open 99.41 and then 98.95, while resilience above it would keep the July move contained.
2. North American Event Risks: The Banco de Mexico meets on 6 August with the swaps market pricing about a 40% chance of a hike. The US has threatened 50% tariffs on $20 billion of Canadian goods that could be implemented as early as 19 August. Canada also faces three byelections in late August that will determine whether Prime Minister Carney’s government retains its slim majority.
3. Asia and European Political Calendar: The BOJ and ECB are both on hold until September, but August data will set the tone. Watch for polling shifts ahead of Germany’s September state elections and France’s presidential contest next spring. In China, watch for stimulus measures following the late-July Politburo meeting, as well as signals ahead of President Xi’s likely September visit to the US.
Conclusion
July was a month in which the USD’s trend lower accelerated only in the final week, driven by an FOMC that talked hawkishly but failed to convince, and by a Japanese yen that is no longer simply a carry-trade funding currency but a vehicle for structural capital repatriation. For dealers and treasurers, the USD’s medium-term trajectory now hinges on whether US data validates the soft-landing narrative or exposes the cracks visible in the Fed’s persistent inflation miss. The secular de-dollarisation trend is real but glacial; the immediate risk is technical, not structural.