The US dollar fell to its weakest level in about four months as traders fully anticipate the Federal Reserve (Fed) will implement an interest rate cut in September. This decline was exacerbated by a significant rally in the Japanese yen, which impacted global currency markets following comments made by Donald Trump regarding foreign exchange (FX) rates.

The Republican presidential nominee, Mr. Trump, stated that the strength of the US dollar has been detrimental to the competitiveness of US exports. He also highlighted that the weakness of the Japanese yen and Chinese yuan provides a trading advantage to Japan and China. This caused a shockwave through FX markets, putting pressure on the dollar and driving the yen sharply higher. The USD/JPY pair dropped over 1%, reaching a new five-week low amid growing concerns about whether short positions on the yen are excessive, especially considering Japanese officials' readiness to intervene and the anticipated interest rate hike by the Bank of Japan at the end of July.

Ultimately, despite Trump's remarks, high tariffs, tax cuts, a weak dollar, and low inflation are an incompatible mix. We are hesitant to predict significant dollar weakness in the second half of this year due to Trump’s inflationary policies, which tend to support the dollar. Nonetheless, the dollar index is now below its 200-day moving average and testing four-month lows.