US dollar tops major currencies in first half, rates gap widens

The US dollar enters the second half of the year as the strongest major currency, having gained against every G10 peer through June. The greenback's rally rests on a simple divergence: the Federal Reserve holds its policy rate at 5.25%-5.50% while other central banks move toward cuts.

The European Central Bank cut rates in June and signalled more easing if inflation continues to soften. The Bank of Japan has tightened modestly but keeps short-term rates near zero, leaving the carry trade structure intact. Dollar-funded carry into emerging markets and yen-funded carry out of Japan both reinforce dollar demand, traders said.

The dollar index DXY hit a fresh year-to-date high in late June at around 106.20, its strongest since November. The euro fell below $1.07 for the first time in two months. Sterling slipped under $1.26. The yen pushed past 161 per dollar, a level that had previously drawn verbal intervention from Tokyo. Japanese authorities have not stepped in with actual yen purchases, leaving the pair to test the upper end of its recent range.

For emerging-market currencies, the dollar's strength has been a drag. The Indian rupee touched fresh lows near 83.60. The Chinese yuan weakened past 7.30 against the dollar despite continued central bank guidance. Dollar-denominated debt becomes more expensive to service, and that pressure tends to show up first in countries with current-account deficits.