Key risks facing the greenback

Growing fiscal risks, softer economic data and uncertainty over Federal Reserve policy could intensify pressure on the U.S. dollar, despite recent strength, according to currency strategists.

Higher U.S. bond yields have helped support the dollar in 2026 by attracting more capital inflows into dollar assets.

The U.S. Dollar Index tracks the performance of the greenback against six major global currencies, including the euro, the pound, the Swiss franc, the Japanese yen and the Canadian dollar. The benchmark is up 1.15% year-to-date, notching a 52-week high of 101.80 on June 24. The index registered at 99.4 as of 5:32 a.m. ET on Wednesday.

Charu Chanana, chief investment strategist at Saxo, said higher Treasury yields do not necessarily support the dollar if investors believe the increase reflects fiscal risk, heavier government borrowing or persistent inflation, rather than stronger U.S. growth or tighter Fed policy, said.

The historic relationship between Treasury yields and dollar strength “still matters,” Chanana added, but “investors should increasingly ask why U.S. yields are rising.”

“A higher yield generated by stronger economic fundamentals is not necessarily equivalent to a higher yield generated by a larger risk premium. That distinction may help explain why higher Treasury yields have recently coexisted with less convincing dollar strength.”

Global bonds sold off this week, with the U.S. 30-year Treasury yield reaching its highest level since 2007. Chanana said any breakdown in the relationship could herald broader portfolio consequences.

“For international investors, U.S. assets have benefited for years from both strong underlying returns and a strong dollar. If that relationship becomes less consistent, geographical diversification may matter more.”

Softer U.S. consumption, inflation and employment data have caused investors to reassess expectations for interest rates, and reduce some bullish dollar positions, according to Societe Generale.

The U.S. economy had shown resilience since the start of the Middle East conflict, with Fed rate pricing underpinning the dollar, said Kit Juckes, chief FX strategist at SocGen.

In a note, Juckes said recent weaker inflation and employment prints have since reduced market expectations for higher U.S. rates.

“Long dollar positions are now being cut back in a thin summer market, as the fundamental justification for holding them fades,” he said, adding that could potentially drive the dollar index lower, or leave it drifting into an “uninspiring” 95–100 range for the rest of the year.