US dollar approaches year high amid global uncertainty

Risks remain tilted to the upside

The US dollar remains well supported as markets grapple with a difficult mix of geopolitical escalation, renewed trade uncertainty and fading confidence in some of this year’s dominant equity themes. The DXY is on track for its strongest weekly performance in five weeks and is rapidly approaching a one year near 102, supported by both safe-haven demand and a renewed rise in energy prices.

The immediate catalyst remains the Middle East. Brent crude is once again testing the $100 mark as US-Iran hostilities continue and Houthi attacks threaten the Red Sea shipping routes that had helped offset disruptions through the Strait of Hormuz. Just weeks ago, investors were debating excess supply and falling oil prices. That narrative has flipped decisively as the risk of broader supply disruptions grows and energy markets tighten.

The implications extend well beyond oil. Higher energy prices are reviving inflation concerns and reversing the recent decline in rates volatility. Markets had begun to unwind expectations for tighter monetary policy following softer US inflation data and repeated ceasefire efforts. That process is now going into reverse. US yields are back near their highs of the year, helped by an exceptionally strong labour market backdrop, with initial jobless claims falling to just 187k – the lowest reading since 1969.

At the same time, renewed trade uncertainty is adding another layer of complexity. President Trump’s decision to impose fresh tariffs on more than 60 countries threatens to weigh on global growth and further fragment supply chains. Combined with growing signs of fatigue in the AI-driven equity rally, risk sentiment is becoming increasingly fragile.

Yet FX markets remain strikingly calm. Volatility remains suppressed and investors continue to favour high-yielding currencies and carry trades, limiting the dollar’s upside despite a fundamentally supportive backdrop. That equilibrium looks increasingly vulnerable.

The main risk to the bullish USD view may not be lower yields or better risk sentiment, but a disorderly JPY-led carry unwind that leaves the dollar stronger against most currencies while still weaker against the yen.

For now, volatility remains conspicuously subdued, even as geopolitical risks accumulate. With the weekend approaching and next week’s Fed meeting on the horizon, markets may be underestimating the potential for a sharper repricing.

Rates still drive USD/CAD

USD/CAD is still taking its cue from rate spreads more than tariff headlines. The White House’s new 50% tariffs on targeted Canadian goods look meaningful on paper, but the scope is narrow, the carve-outs are broad and the measures do not take effect for 30 days. That gives markets room to treat the move as a negotiating tool ahead of further CUSMA talks. The estimated coverage, around USD20bn of exports, is small relative to total Canadian exports.

That does not make the trade threat harmless. The cost for Canada is often less about the tariff line itself and more about the uncertainty it creates for investment, hiring and business confidence. The Bank of Canada has already argued that US tariffs and trade uncertainty have pushed Canadian activity onto a lower path. Canada also enters the talks with domestic vulnerabilities, including weak business investment, poor productivity and heavy reliance on the US market.

The rate channel is carrying more weight in the near term. US short-end yields have been more responsive to the latest oil move, while Canadian yields have stayed relatively contained after June CPI cooled to 2.8% and core inflation eased. That reduces the urgency for Canadian yields to follow the US move higher. It also fits the current macro setup: CAD is trading as a blend of rates, growth divergence and policy uncertainty, not simply as a tariff shock.

The latest retail sales data give CAD a better domestic counterpoint, but not enough to change the broader policy story. Retail sales rose 1.0% m/m to C$73.7bn in May, matching consensus, while ex-auto sales rose 1.2%, only slightly below the 1.3% expected on the calendar. Core retail sales rose 0.9%, volumes increased 0.3%, and the advance estimate points to another 0.4% gain in June, which should support monthly GDP and reinforce the “signs of improvement” message from the BoC. Still, with inflation cooling and demand improving only gradually, the data argue for a patient central bank.

Heavy short positioning should also cap the downside risk for CAD unless a new driver emerges. The latest futures data show speculative accounts still heavily short the loonie, around -199k contracts, despite the brief rebound in recent weeks. That kind of stretched positioning can leave USD/CAD exposed to a pullback if tariff rhetoric cools, Canadian data continue to firm, or US yields lose momentum. The USD/CAD is trading near 1.408, below the 20-day average around 1.413 but still above the 50-day near 1.401. A break through 1.4015–1.4000 would bring 1.387–1.385 back into view, while a recovery above 1.413 would put 1.42 back on the table.

ECB holds firm as markets price more hikes

The ECB left all three policy rates unchanged, keeping the deposit rate at 2.25%. President Lagarde reiterated the Bank’s meeting-by-meeting approach, with future policy decisions remaining firmly data dependent.

She also stressed that inflation risks remain tilted to the upside, noting that the Governing Council no longer holds the more balanced view on inflation and growth dynamics she referenced at the ECB’s annual conference in Sintra before tensions in the Middle East began to ease.

The euro’s reaction was broadly muted, despite briefly touching a three-week low against the US dollar amid a surge in oil prices.

Markets had already turned more hawkish ahead of today’s meeting. The two-year OIS rate has risen steadily since the conflict re-escalated and is now hovering near its highest level since mid-2024. The bar for further hawkish repricing was high.

Investors are now pricing in almost two rate hikes by year-end, with the first expected in September. We favour just one additional hike. Developments in the Middle East remain fluid, but the balance of risks still points towards further de-escalation. At the same time, a softening labour market and weaker economic activity across the eurozone should help keep second-round inflation effects in check.

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Calendar: July 20-24

All times are in EST

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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.