J.P. Morgan is maintaining its long-US Dollar position despite renewed doubts over Federal Reserve credibility, arguing that inflation risks, relative yields and weak alternatives should keep the Greenback supported.
The US Dollar suffered a sharp setback after the Federal Reserve meeting, with investors questioning whether policymakers would convert their inflation concerns into actual tightening.
The fall was most dramatic against the Yen.
USD/JPY ended July around 157.45 after reaching a yearly high close to 163.98, while the Dollar also lost ground against the Euro, Pound, Canadian Dollar and New Zealand Dollar over the month.
The Australian Dollar remained the strongest major currency against the Greenback in year-to-date terms, with USD/AUD down just over 5%.
J.P. Morgan nevertheless believes it is too early to abandon the long-Dollar trade.
The bank described the Fed meeting as a “material setback” for the currency, but argued that it was “not the end of the long-USD trade just yet”.
The initial disappointment came from both the policy decision and Chair Kevin Warsh’s press conference. J.P. Morgan said the communication reintroduced concerns over the Fed’s credibility in lowering inflation, particularly as Warsh appeared unwilling to define clearly what would trigger further tightening.
The Dollar’s decline was amplified by the extreme repricing of the front end of the US curve and by suspected intervention in USD/JPY. J.P. Morgan noted that the fall in Dollar yields matched the scale of the currency move unusually closely, while long-Dollar positioning also left the market vulnerable to a squeeze.
Even so, the bank sees three reasons to remain constructive.
First, inflation breakevens remain elevated. J.P. Morgan believes the risks around inflation are still skewed higher, which should prevent markets from pricing an aggressively dovish Fed path.
Second, short-dated US yields remain high in absolute terms.
Although yield differentials have narrowed, the bank argues that the Dollar still offers a meaningful carry advantage over several low-yielding currencies.
Third, alternatives to the US Dollar are not especially compelling.
J.P. Morgan remains cautious on the Euro, Swiss Franc, Swedish Krona, New Zealand Dollar and Canadian Dollar, while also seeing limits to sustained gains in Pound Sterling and the Yen.
The bank said the Dollar “does have offsets”, including the possibility that markets may have moved too quickly in pricing out further Fed tightening.
J.P. Morgan’s preferred long-Dollar expressions remain selective rather than broad-based, with the bank favouring USD against lower-yielding and more rate-sensitive currencies.
The latest year-to-date performance chart underlines that distinction.
USD/CAD and USD/EUR remained above their end-2025 starting points, while USD/GBP was only slightly lower and USD/JPY was broadly flat after the intervention-driven reversal. USD/AUD was the clear outlier, remaining around 5% below its starting level.
Analysts at J.P. Morgan retain their long-Dollar stance, although the bank acknowledges that the Fed credibility debate has made the position less straightforward and increased the risk of further near-term volatility.
