After months of uncertainty, currency markets are shifting from panic to pragmatism. The US dollar has staged a notable comeback, buoyed by resilient economic data and last-minute trade deals with Japan and the EU. For businesses managing currency exposures, August presents both opportunities and risks as volatility returns to the FX landscape. How prepared is your business?
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USD rebounds amid trade relief
After a six-month slide, the USD snapped back in July, rising 2% and breaking a three-year low. This rebound was driven by easing trade tensions and stronger-than-expected US economic data. While the long-term impact of new 15% baseline tariffs remains uncertain, investor sentiment has improved, and equities are hitting record highs.
The Federal Reserve’s decision to delay rate cuts, combined with renewed US growth momentum, has further supported the dollar. However, the question remains: is this a sustainable uptrend or a temporary bounce?
FX market highlights
- EUR: The euro had its worst month of the year, largely driven by USD strength. After a strong six-month rally, the pair is now under pressure.
- GBP: Sterling briefly touched its highest level against the dollar since October 2021 before retreating over 3%, breaking its 2025 uptrend.
- AUD: The Aussie dollar saw its biggest monthly drop against the dollar in a year, but remains within a stable trading range (0.63–0.65), still 3% above its year-to-date average.
Key themes to watch
1. Trade pacts and power plays
August 1 marked the deadline for tariffs of up to 50% on key US trading partners. While Japan and the EU secured deals, China faces a tougher path. These developments favor the USD in the short term, as the US continues to extract concessions in trade negotiations.
2. U.S. economic inflection point
Markets are closely watching US macro data for signs of economic resilience or weakness. Strong growth and inflation figures could validate the AI-driven stock market rally and support the dollar further. Conversely, any signs of slowdown could reignite concerns about a market bubble.
3. Seasonal volatility returns
August is historically a volatile month for FX markets due to thinner liquidity, central bank meetings, and geopolitical developments. Businesses should brace for potential price swings and consider proactive hedging strategies.
Is the worst over for the USD?
Despite earlier fears of capital flight, foreign investors increased their holdings of US assets in May. The dollar’s decline earlier this year was more about portfolio rebalancing than a fundamental shift. With alternatives like the euro, pound, and yen facing their own challenges, the USD remains relatively attractive.
Still, risks remain. A breakdown in the “soft landing” narrative or renewed global growth concerns could quickly shift sentiment. For now, the dollar’s strength appears supported, but vigilance is key.
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