Dollar Dominance Remains Unshaken Despite Rising Inflation Risks

Predictions of the dollar's demise have become a recurring feature of international monetary debate, but its dominant position has proven remarkably resilient. The key to understanding this lies in how central banks think about tomorrow, not what they hold today.

Reserve portfolios adjust slowly, and most observers focus on immediate trends rather than future strategies. This is evident in the recent increase in liquidity support buyback operations for longer-dated nominal coupon securities, which will be at least double the current maximum size of $2 billion per operation, effective September 9, 2026.

The Federal Reserve's FOMC meeting minutes revealed that several participants favored raising the target range for the federal funds rate if inflation didn't decline. This was also reflected in market pricing and outreach, which indicated a one-in-three chance of an increase at the July FOMC meeting, with about a 25 basis point hike by the September meeting and another by the end of the first quarter of next year.

The minutes also showed that participants judged inflation risks as skewed to the upside, with many saying a rate hike was likely needed if inflation didn't decline. Fed chair Warsh's shift in stance on forward guidance may make the FOMC meeting minutes more important than before.