Forex: the Dollar's Rivals Are Not Resting on Their Laurels

The dollar has a long-term advantage. In the short term, rivals may benefit from tightening expectations elsewhere. The euro, for instance, can rally against the dollar if the ECB signals a September rate hike. ECB President Christine Lagarde hinted at such a move, traders said, though no change is expected at the July meeting. That could push EUR/USD higher.

Sterling's path depends on a busy economic calendar. The labour market is expected to stabilise, while inflation and retail sales are forecast to slow. That backdrop reduces the likelihood of a Bank of England rate increase and may prompt profit-taking on long GBP/USD positions, traders said. Stronger-than-expected data would allow buyers to return, they added.

The yen remains under pressure despite Prime Minister Sanae Takaichi's comments encouraging pension funds like GPIF to invest in Japanese assets. The yen is used as a funding currency in carry trades, which flourish with low volatility and rising risk appetite, traders said. That keeps the currency weak against the dollar and other high-yielders.