In his first major credibility test as Federal Reserve Chair in June, Kevin Warsh demonstrated clear independence from the White House. Despite the president’s calls for lower official interest rates, Warsh and the committee kept the target rate unchanged at 3.5% – 3.75% and reaffirmed their commitment to bringing inflation back to the 2% target. Nearly all Fed officials voted to either raise rates or leave them unchanged, with only one policymaker dissenting in favour of a cut. This hawkish stance surprised markets, prompting them to reprice rate hikes for the year.
A day later, the signing of the Memorandum of Understanding between the US and Iran led to a sharp drop in oil prices, returning them to pre-conflict levels. In principle, this should benefit euro area importers and support the euro against the US dollar. In practice, however, it has also led markets to price out some anticipated European Central Bank rate hikes, partly due to weaker-than-expected regional growth.
Moreover, US economic resilience continues to support the dollar. AI infrastructure spending remains a key driver of growth, while the Trump administration’s tax and spending package has provided a supply-side boost. At the same time, the US–Iran conflict ultimately benefited the US economy by reinforcing its position as a net energy producer.
The combination of renewed Fed credibility, resilient domestic growth and favourable interest-rate differentials currently favours the US dollar. However, the recent appreciation of the greenback has already been substantial, and the main risk is that investors may look to diversify away from heavy concentrations in US assets, as they did earlier this year, now that one of the principal geopolitical headwinds appears to have eased.
Date of report: July 8th of 2026