What factors drove the U.S. dollar to a two-month low ahead of the Federal Reserve’s July meeting minutes, including the decline in Treasury yields, major currency movements, fading expectations of a September Fed rate hike following weak U.S. economic data, the unwinding of long

The dollar’s two-month low mainly reflected a reassessment of U.S. interest-rate prospects: softer employment, inflation and retail-sales data reduced the expected return on dollar assets and prompted investors to unwind previously long-dollar positions. Lower Treasury yields reinforced that move, while the euro strengthened and the yen and Swiss franc attracted support.

Main drivers

• Treasury yields eased: The pause in the Treasury selloff and decline from recent yield highs reduced the dollar’s rate advantage. The exact 10- and 30-year yield levels are not available in the supplied evidence, but those maturities matter because they proxy long-term U.S. growth, inflation and financing expectations.

• Currency moves: The euro reached a two-month high, the dollar weakened against the euro and Swiss franc, and the yen remained near ¥160 per dollar as markets also looked toward the Bank of Japan.

• A September Fed hike became less likely: The U.S. economy unexpectedly lost 23,000 jobs; July retail sales then fell 0.6% after a 0.2% June gain. Markets consequently put the chance of a September hike at only 31%, compared with 69% odds of a hike by December.

• Positioning amplified the decline: As investors reduced bets on near-term Fed tightening, they sold dollars already held for a hawkish-policy scenario. Concerns about U.S. economic momentum added to the unwind.

• Analytical outlook: The immediate outlook was bearish-to-cautious for the dollar because markets were pricing a more dovish Fed response to weaker data. But it was not an unqualified dollar-negative view: uncertainty over inflation, the eventual policy response, global growth and long-dated Treasury borrowing needs could keep markets volatile.

Iran, oil and safe havens

• U.S.–Iran conflict risk lifted oil prices when strikes threatened Middle East energy shipping, which could raise inflation risks and, at times, revive support for the dollar and other safe havens.

• Conversely, expectations of a near-term easing of Middle East tensions—and a U.S.–Iran memorandum of understanding—had previously pushed oil futures and near-term inflation compensation lower, reducing one argument for Fed tightening.

• Thus, geopolitics created a two-sided effect: it could boost oil and safe-haven demand during escalation, but a de-escalation could lower inflation expectations and weaken the case for further rate increases.

Why the July FOMC minutes mattered

The minutes could show how serious the Committee’s inflation concerns were, how policymakers weighed weakening activity against inflation risks, and whether the three July dissenters who wanted an immediate hike represented a broader hawkish faction or an isolated minority. A clear sign of persistent hawkish concern could have supported yields and the dollar; evidence that most officials prioritized slowing growth or saw inflation risks easing would validate the market’s reduced September-hike expectations.