Newsletter · · Ashutosh Agarwal

The Hike Trade Creeps Back Before the Fed - The Dollar Brief - Week of July 24, 2026

The Dollar Brief for the week of July 24, 2026. A hot jobs report revived the Fed rate-hike trade days before the FOMC meets, and the week's real fight was over Kevin Warsh himself, with strategists split on whether the new Fed chair is a hawk, a closet dove, or someone quietly stacking the deck toward cuts.

The Dollar Brief

Week of July 24, 2026: The Hike Trade Creeps Back Before the Fed

Ten days ago the "buy the dollar" trade looked dead. A soft June inflation report had landed, the odds of a Fed rate hike had collapsed, and the crowd that had bet all summer on a stronger dollar was licking its wounds. Then something quiet happened this week: the trade came back from the dead. On the back of a very strong jobs number, the betting on a rate hike crept right back up, just days before the Fed meets next week. The dollar is back near the top of its recent range.

But the more interesting story isn't the number the Fed announces on Wednesday. Almost nobody thinks the big drama is the rate itself. The real fight this week was about one man: is Kevin Warsh, the new Fed chair, the inflation hawk he sounds like, or a dove who is quietly building the intellectual case to cut rates while telling everyone he'd never dream of it? This week the professional strategists, the bank economists, and the independent analysts all lined up on that question, and they split three ways. Here's the week the dollar trade got its pulse back, and the Warsh riddle got sharper.

TL;DR

  • The hike trade is being rebuilt right into next week's meeting. After the soft June inflation report knocked July hike odds down to about "12%" earlier in the month (Ed Yardeni and Rick Santelli walked through the collapse on Power Lunch, Jul 14), they've since climbed back. This week real-estate investor Michael Zuber reported the market-implied odds "now" at a "36% chance we will get a rate hike next week" and "up to 64% for a rate hike in September," pinning it on record-low jobless claims of "187,000," on One Rental At A Time (Jul 23).
  • A big bank finally put a number on the dollar, and it's a soft-dollar call. Deutsche Bank's Ozan Tarman said the dollar index is "back up close to 101" but "a bit stuck," and that his "official surveillance call" is for the euro to rise toward 1.20 (a weaker dollar) if the market keeps rotating out of tech, while a comeback in "US exceptionalism" would push it back to 1.10–1.11 (a stronger dollar), on Bloomberg Surveillance (Jul 20).
  • The Warsh riddle split three ways. One camp says he has to hike to prove he's not the President's puppet (Jeff Snider's team on Eurodollar University, Jul 20). Another says he's secretly dovish and "letting the committee run wild" (TD Securities' Gennady Goldberg on TD Cowen Insights, Jul 14). A third says he's quietly "laying the intellectual groundwork for rate cuts" (Brookings' Wendy Edelberg on Marketplace, Jul 20).
  • Three independent sources flagged the same thing: Warsh's new "task forces" look stacked. A Brookings economist, JPMorgan's rates and economics team, and a crypto-focused analyst last week all noticed the panels reviewing inflation measurement and the balance sheet are staffed with people who already agree with where Warsh wants to go, "to take a rabbit out of the hat, you got to put a rabbit in a hat," as JPMorgan's Mike Feroli put it on At Any Rate (Jul 22).
  • A fresh sub-fight opened up over Japan and the "carry trade." One side says Japan is about to pull its money home, which would strengthen the yen and could yank cash out of U.S. tech stocks (Deutsche Bank estimates up to "10% of GDP," per Merryn Talks Money, Jul 17). The other, economist Steve Hanke, says the exact opposite, Japanese rates will fall, the money stays abroad, and "the dollar is very, very strong" and stays that way, on The David Lin Report (Jul 22).
  • The de-dollarization camp got a genuinely new data point. Economist Nomi Prins said a European Central Bank report shows gold has now "overtaken U.S. treasuries as the number one reserve" asset that central banks added last year, and called the dollar's current strength "artificially high," on Soar Financially (Jul 22).
  • The freshest word, dated today: don't hike into an oil shock. Morgan Stanley's Jim Caron said that if Warsh surprised everyone with a hike next week it would hit markets "in a negative way," because today's inflation is a "supply side shock" from oil ("why would you hike into a headwind?"), on Bloomberg Surveillance (Jul 23).

What's new

Start with the thing that actually moved: the hike trade got its pulse back. Rewind to mid-July. The June inflation report came in soft, and the betting on a July rate hike fell off a cliff, from around "42%" down to "12%," as Yardeni Research's Ed Yardeni and CNBC's Rick Santelli described it in real time on Power Lunch (Jul 14), with Santelli noting the yield curve steepened sharply (the gap between short and long-term rates widening from the "mid-20s to nearly 40 basis points") as traders bet the Fed would stay patient. That was the story that carried into last weekend: soft inflation, patient Fed, dollar wobbling.

This week it reversed. On One Rental At A Time (Jul 23), investor Michael Zuber opened with a blunt question ("Are you ready for a surprise July rate hike?") and reported that the market-implied odds had climbed back to "a 36% chance we will get a rate hike next week" and "64% for a rate hike in September." The trigger, in his telling, was the labor market refusing to cool. Weekly unemployment claims, the Thursday drumbeat that tells you how many people just lost their jobs, "just posted another record low" of "187,000," beating the prior record of "189,000," and this wasn't a fluky holiday week: "It was just a middle of summer, full week report. And the job market appears strong." His logic is the Fed's logic: full employment plus sticky inflation gives a hawkish Fed cover to move. So the "buy the dollar" trade that got knocked sideways two weeks ago is quietly being rebuilt going into the meeting. (Zuber is a real-estate investor and educator, read this as a well-informed retail-market read on the odds, not an insider view.)

A major bank finally put an actual number on the dollar, and, notably, it's a call for the dollar to weaken. For weeks the loudest dollar voices were on gold and crypto shows. This week Deutsche Bank's Vice Chair of Global Macro, Ozan Tarman, laid out the house view on Bloomberg Surveillance (Jul 20). He described the dollar index as "back up close to 101" after the Iran war interrupted the year's weak-dollar story, but said the currency is now "a bit stuck." His framing: it all hangs on the AI-tech trade. "If US exceptionalism comes back, then all these calls of" the euro at 1.10–1.11, a stronger dollar, "may be back. If we go through these choppy times, more rotation, then my official surveillance call of" the euro at 1.20, a weaker dollar, "has more chance." In plain terms, Deutsche Bank's official forecast is for a softer dollar, contingent on the great rotation out of crowded tech continuing. He was candid that this is a low-conviction, choppy market: the dollar "won't rip" and won't collapse either, "it's going to be continue to chop, chop, chop." His actual trade advice was to look away from the majors entirely: "G3, G4 FX won't be the place to be. Emerging markets carry, especially on high oil exporters... Your Brazils, your Mexicos, that may be the place to be." He also flagged that the crowded summer bet, "shorting US rates versus going long euro rates", is unwinding and turning into "a pain trade." (Tarman is a sell-side bank strategist, a professional dealer's view, and one bound by a "mandate": he noted Deutsche Bank's official forecast is still two hikes even though he personally leans toward "no hikes at all.")

On Warsh himself, Tarman gave the dovish tell that ran through half the week's commentary. Asked how he reads the new chair, Tarman said "so far, he's passing the test," helped by soft inflation data, but then: "deep inside he wants to talk tough, not talk much, get rid of forward guidance and end up not touching it. I'm not too sure he's too keen to hike... If data continues to come like they did the past week, I think we may end up with no hikes at all."

That "talks tough, won't actually hike" read got its fullest defense from TD Securities. On TD Cowen Insights (Jul 14), global rates strategist Gennady Goldberg said TD's official call is "no Fed rate hikes or cuts in 2026 or 2027", flat, both ways, even as the market pencils in "about 45 basis points of rate hikes by early 2027." His read of Warsh is that the chair is deliberately staying silent to let others carry the hawkish message: "I don't think he's very much in favor of rate hikes, but he's sort of letting the committee run wild." By refusing to give forward guidance, Warsh "cedes that ground to other FOMC members, and there are more than happy to take on the mantle", Goldberg noted "almost half the committee saw a rate hike this year is appropriate" in the June projections. Why won't they actually hike? Because the thing driving inflation fears, the AI investment boom, can't be tamed by rate hikes. The interest rate that would actually slow AI spending, Goldberg joked, "is probably north of 10 percent or higher," and a 50-to-75 basis point hike "isn't going to make a material dent in the demand for AI. But it will make a substantial challenge for consumers and the housing market." His clever kicker: the market is doing the Fed's work for it. With traders already pricing in tightening, "the Fed doesn't actually have to deliver these... as long as they're credible." (Goldberg is a sell-side strategist.)

The dovish read went furthest, into "he's stacking the deck", from Brookings. On Marketplace (Jul 20), host Kai Ryssdal put the puzzle plainly ("new game: what is Kevin Warsh thinking?") to Brookings senior fellow Wendy Edelberg. Her answer cut against the whole market: "I am surprised that the market is putting so little weight on possible rate cuts. The market seems to be betting that Kevin Warsh will revert to his traditionally hawkish instincts and disappoint the way that Powell did. And that's certainly possible. But I would not bet so strongly against Trump getting at least some of the rate cuts he wants." Her evidence is the new task forces Warsh set up: "I see Warsh as already laying the intellectual groundwork for rate cuts... I think he's telegraphing that this work will eventually produce an analytical case for lower rates without any suggestion that he's responding to pressure from the White House." She quoted Warsh's own words on AI from his testimony: "will it increase measured prices over the course of the next 12 months? I suspect it will. But whether that's inflationary or not, that's up to the Federal Reserve. And we're going to have something to say about that," and called it "an extraordinary thing for the chairman of the Fed to say." Her prediction: "my bet is that the task force says that AI-related price increases should be ignored," and "there are alternative measures of inflation that show that inflation is lower than the official indices indicate. And... Warsh will follow those." When Ryssdal said she was accusing him of "stacking the deck," she softened it to "a coincidence of wants", but the implication was clear. On whether the Fed can tolerate years of above-target inflation without acting, she was tart: "there's an institutional requirement that he looks like he's always on the verge of fixing that... It always has to look like it's going to get fixed around the corner." Her closing frustration: even after former New York Fed chief Bill Dudley publicly said the Fed must raise rates, "I just don't see why no one's talking about all the indicators pointing to a rate cut." (Edelberg is a mainstream, non-partisan economist, which is what makes the "stacking the deck" suggestion notable coming from her rather than from a gold-show commentator.)

The hawkish read, he'll hike to prove a point, came from the plumbing side. On Eurodollar University (Jul 20), independent analyst Jeff Snider and co-host Steve argued Warsh will raise rates next week for reasons that have nothing to do with the economy and everything to do with credibility. "Warsh has to hike rates," Snider said. "I think Warsh, to establish the independence here, is going to hike rates", to say, in effect, "I'm not Trump's lackey." The proof, in their reading, is in his language: the statement after his first meeting ended with "we will not tolerate inflation," and "what did he tell Congress this past week? We will not tolerate inflation." So a hike, they think, is "baked in" and "priced into the market." The real question is what comes after: "Would there be a second hike... a third hike?... Or is the Fed going to be like one and done?" Their bet is one-and-done, and possibly a mistake: "hike to send a message, and then, oh crap, we got this all wrong. The economy wasn't resilient. There really is no inflation risk." Their evidence for "no inflation risk" is the bond market and the housing market. Even with oil back "into the $80 range," the 2-year Treasury yield sits "back into the 4.10s" and the 30-year "get[s] up right around 5.1%... and they just grind to a halt", a ceiling that, they argue, means the market sees weak growth, not inflation. Meanwhile mortgage lending "dropped to the lowest level since February," and pending home sales "crash[ed]" heading into the peak buying season, a sign, Steve said, of "the economy really running out of money." Their warning: if the Fed hiked several times, the yield curve "would invert almost immediately." (Snider is an independent analyst focused on dollar-funding "plumbing.")

The professionals who'll be trading the meeting are quietly watching the balance sheet, not the rate. On At Any Rate (Jul 22), JPMorgan's chief U.S. economist Mike Feroli and global head of rates strategy Jay Barry dug into Warsh's five new task forces. Feroli's framing: these are "the chair's task forces", Warsh's way of putting "a little bit of a stamp on the framework" he wasn't around to shape last year. And he echoed the stacking-the-deck point without endorsing the conspiracy: many of the people staffing the panels "have publicly aligned with some of the stated preferences... to take a rabbit out of the hat, you got to put a rabbit in a hat." He added a reality check, a Fed governor gave a speech on AI and the labor market last week and "did not mention the task forces at all," a sign "the rest of the committee is going to need some convincing." Barry's focus was the money, not the politics: the balance-sheet task force is the one that matters for markets. Warsh has long wanted to shrink the Fed's giant bond holdings, and Barry thinks it could come down "by $600 or $700 billion," which by JPMorgan's models would push 10-year yields "higher by 15 to 20 basis points" and steepen the curve. He invoked the scars that make this delicate, the 2013 "taper tantrum," when yields jumped "about 150 basis points" in three months, and the September 2019 episode when overnight funding rates "moved about 300 basis points above" the Fed's target. His reassurance, quoting Warsh: "if it took 18 years to get here, he's not going to bring the balance sheet back to where he wants it to be in 18 minutes or 18 months." Higher long-term yields, done slowly, would tend to support the dollar at the margin. (Feroli and Barry are sell-side bank professionals.)

The freshest voice, from a Wednesday recording, argued a hike would be a mistake. On Bloomberg Surveillance (Jul 23), Morgan Stanley Investment Management's Jim Caron connected the dots between the wobble in tech earnings and the Fed. He read the soft reactions to Alphabet's and Tesla's results not as an alarm but as "a readjustment in prices", the market accepting that this year's blistering earnings pace is "unsustainable" and rotating into value, healthcare, financials, industrials and materials. What struck him is that stocks are holding up even as bond yields climb, a combination that "six months ago... would absolutely [have] spell[ed] a disaster," and which he called "a really important signal." Asked what happens if Warsh surprises everyone with a hike next week, Caron was clear: "it's actually going to impact things in a negative way," because "this is a supply side shock" from oil, and the Fed's tools are built for demand-driven overheating. "A rate hike is basically just saying we're going to hike into something that's going to slow the market in the future... Why would you hike into a headwind?" His most interesting idea is that Warsh is deliberately making the near-term rate path bumpier on purpose, "strategically reintroducing volatility into the front end of the curve", as a kind of shock absorber: "If you get the shock absorber right, you get a smooth ride for the back end of the curve," which is where mortgages and corporate borrowing live. (Caron is a professional asset manager.)

The debate: is Warsh a hawk, a dove, or a magician?

This is the cleanest fight of the week, and it resolves in days. Line the views up and they scatter across the whole spectrum, which itself tells you nobody really knows.

  • He'll hike to prove independence, then stop (Jeff Snider, independent analyst). A "one and done" hike as a credibility statement, likely followed by cuts once the economy rolls over, on Eurodollar University (Jul 20).
  • He won't hike at all, he's just letting the hawks talk (Gennady Goldberg, TD Securities, strategist). Flat rates through 2027; Warsh "letting the committee run wild" while privately opposing hikes, on TD Cowen Insights (Jul 14).
  • He's building the case to cut (Wendy Edelberg, Brookings, economist). The task forces are scaffolding for lower rates; markets are wrong to ignore the cut scenario, on Marketplace (Jul 20).
  • Talks tough, probably doesn't touch it (Ozan Tarman, Deutsche Bank, strategist). "We may end up with no hikes at all" if data stays soft, even though the bank's official call is two hikes, on Bloomberg Surveillance (Jul 20).
  • Doesn't matter which, a hike would be a policy error anyway (Jim Caron, Morgan Stanley, asset manager). You don't hike into a supply shock, on Bloomberg Surveillance (Jul 23).

Why it matters for the dollar. The two dovish readings and the hawkish one point in opposite currency directions. If Warsh is quietly building a case to cut (Edelberg) or simply won't hike (Goldberg, Tarman), the dollar's recent bounce is living on borrowed time. If he hikes to prove a point (Snider), the dollar gets a near-term lift, but even Snider thinks it's a one-off that reverses. The one place they overlap is the tone: everyone expects hawkish-sounding language regardless of the actual decision. So the trade next week may be less about the rate and more about whether the market believes the tough talk.

The one thing three very different people agreed on. It's worth pausing on the rare consensus. A Brookings economist (Edelberg), JPMorgan's economics-and-rates team (Feroli and Barry), and, last week, a crypto-focused analyst all independently noticed that Warsh's task forces reviewing inflation measurement and the balance sheet appear staffed with people who already share his views. When a mainstream centrist, a bulge-bracket bank, and a gold-and-Bitcoin commentator reach the same conclusion from opposite ends of the room, it's worth taking seriously, not as proof of a plot, but as a genuine signal that the machinery for a future policy pivot is being quietly assembled.

The new sub-fight: is Japan about to pull its money home?

A fresh thread this week, and it matters for the dollar because of the "carry trade", the decades-old habit of borrowing money cheaply in Japan (where interest rates are near zero) and parking it in higher-yielding assets abroad, including U.S. stocks and bonds. That flow has quietly supported the dollar and U.S. markets for years. Two smart people took opposite sides on whether it's about to reverse.

The reversal case. On Merryn Talks Money (Jul 17), Bloomberg's Merryn Somerset Webb and John Stepek flagged that Japan's finance minister, Katayama, had spoken that week about encouraging local investors, including the country's "whopping great government pension fund" (the GPIF, one of the largest pools of money on earth), to bring capital home and invest in Japanese assets. This would reverse a trend that began around 2014, when a deliberately cheap yen sent Japanese money flooding abroad. They cited a Deutsche Bank estimate that, at the maximum, the money repatriated "would amount to about 10% of GDP, which should be something of a game changer for the yen." The risk they highlighted: if the carry trade "suddenly reverses, then a whole load of money could come out of various assets, including... hot tech stocks", and the "most vulnerable asset was probably French sovereign bonds." They framed it as a possible "turning point for global financial repression," where indebted governments lean on their own citizens to fund them. Deutsche Bank's Tarman made the same point from the strategy desk, calling Japanese repatriation the "one good that may finally come" for a weaker dollar, while admitting, with a shrug, that it's been promised for so long he quoted Waiting for Godot.

The contrarian case. On The David Lin Report (Jul 22), Johns Hopkins economist Steve Hanke said the whole worry is backwards. The consensus, he explained, assumes Japanese interest rates are rising, which would make the carry trade more expensive and pull money home. Hanke thinks Japanese rates will fall, because, in his money-supply framework, "inflation's going to come down because the money supply isn't growing." If he's right, "the carry trade will stay as it's been. A huge carry trade where they're exporting a lot of capital out of Japan into other markets." His conclusions follow directly: the yen "will continue to depreciate against the dollar," and on the dollar overall, "it appears that the strength will continue... at least in the short run, the dollar is very, very strong." He tied the yen's weakness to Japan's new prime minister "priming the pump" with bigger deficits on top of "the world's record level of debt as a percent of GDP." (Hanke is an academic economist; the Merryn hosts are financial journalists relaying a Deutsche Bank study, treat both as informed analysis, not positions.)

The upshot: the carry trade is now a two-way dollar risk. If Japan really does pull money home, the yen strengthens and some of the fuel under U.S. markets and the dollar drains away. If Hanke is right that Japanese rates fall instead, the carry trade keeps humming and the dollar stays firm. Which way Japan's central bank leans is suddenly a dollar story worth watching.

The long game: gold quietly passes Treasuries

The slow-burn de-dollarization theme got one genuinely new, concrete data point this week. On Soar Financially (Jul 22), economist and author Nomi Prins pointed to a fresh European Central Bank report showing that gold has "overtaken U.S. treasuries as the number one reserve" asset that central banks added last year, a milestone, if it holds up, in the world's slow diversification away from dollar debt. She paired it with the World Gold Council finding that "45 percent" of central banks are increasing their gold holdings, and the now-familiar China figure: Beijing has cut its Treasury holdings "from $1.3 trillion... down to $620 billion... in just the last seven years" while buying gold, with "another 5% to go" to hit its target. Her read on the strong dollar was pointed: "right now, I think it's artificially high, the DXY," inflated by short-term "inflation fear" and rate-hike fear from the oil spike rather than by anything structural. Steve Hanke, from the other side of the rate debate, agreed on one thing, that China is buying far more gold than the official numbers show, "orders of magnitude greater," citing a recent Goldman Sachs analysis. Both noted gold has cooled from a peak near "$5,500" to around "$4,000," which Hanke attributed partly to the very thing that's lifting the dollar: a higher-rate, strong-dollar backdrop raises "the opportunity cost of holding gold." (Prins and Hanke are economists; both are long-run gold bulls, so weigh the price targets accordingly, the checkable claim is the ECB reserve-mix data, not the forecasts.)

Read-throughs

  • Next week's meeting is a tone trade, not a rate trade. The consensus across strategists, economists, and analysts is that a hike is possible but not likely, the odds sit near a third for July (One Rental At A Time, Jul 23). What moves the dollar is whether Warsh's language sounds like a man who means the tough talk. Hawkish tone supports the dollar; any hint of the "laying groundwork for cuts" reading undercuts it.
  • Oil is still the switch under everything. Higher oil both revives inflation fear (keeping the Fed hawkish, dollar-supportive) and, per the plumbing analysts, drains dollars from the world. But Morgan Stanley's Caron flags the flip side: hiking because of oil would be a policy error, and markets would treat it as one (Bloomberg Surveillance, Jul 23).
  • The AI-tech trade remains a currency story. Deutsche Bank's whole dollar call hinges on it: keep rotating out of crowded tech and the dollar softens toward euro-1.20; a return of "US exceptionalism" pulls it back to 1.10–1.11 (Bloomberg Surveillance, Jul 20). This week's wobble in Alphabet and Tesla earnings is exactly the kind of thing that decides which path wins.
  • Watch the balance sheet, not just the rate. If Warsh's task forces move toward shrinking the Fed's bond pile, JPMorgan sees 10-year yields drifting up 15–20 basis points (At Any Rate, Jul 22), a slow, structural support for the dollar that has nothing to do with the headline rate decision.
  • Japan is a new early-warning light. Any concrete move to bring Japanese money home would strengthen the yen and could pull cash out of U.S. tech and the dollar (Merryn Talks Money, Jul 17). The counter-signal is Japanese rates falling, which keeps the carry trade, and the dollar, firm.

What changed

Last week the pros entered the chat and disagreed about the Fed's inflation math; this week they turned to Warsh the person, and the market re-armed the hike trade underneath them. The clean shift is in the odds: a July hike had collapsed toward "12%" after soft inflation, and by this week it had climbed back to roughly "36%," with September at "64%," on the strength of a record-low jobless-claims number. A big bank (Deutsche Bank) finally attached a real forecast to the dollar, and it's a soft-dollar call contingent on the tech rotation. And the Warsh riddle sharpened from "hawk or not" into a genuine three-way split: hikes-to-prove-a-point, won't-hike-at-all, or secretly-building-the-case-to-cut. A brand-new sub-theme, whether Japan pulls its money home, opened a second dollar debate that didn't exist a week ago. It all points at one hard date on Wednesday, where the question isn't really the rate; it's whether the market believes the man setting it.