Dollar rally offers Fed’s Warsh limited inflation help

The dollar rally inflation watchers are eyeing has given Federal Reserve Chair Kevin Warsh some backup, but MarketWatch reports it may be too weak a shield against pricier oil, tariffs and elevated borrowing costs.

Warsh, who pledged in June to return inflation to the Fed’s 2% target, heads into his second rate-setting meeting as chair with several forces working against him. MarketWatch reported that oil prices have climbed nearly 15% in July after renewed U.S.-Iran hostilities in the Middle East.

Treasury yields have also stayed high, adding to financing costs across the economy, while another round of Trump administration tariffs could lift prices on items including cars and electronics, according to MarketWatch.

The greenback has bounced back, but the move follows a rough stretch. The ICE U.S. Dollar Index dropped nearly 10% in 2025 and has gained about 3% in 2026, MarketWatch reported.

Can a stronger dollar cool inflation?

A stronger dollar can help bring down inflation by making imported goods cheaper for U.S. buyers. It can also pressure commodities, which are commonly priced in dollars, though U.S. companies may dislike the effect because foreign revenue and profits are worth less when translated back into dollars.

The ICE U.S. Dollar Index measures the dollar against a basket of other major currencies. MarketWatch reported that the index fell to a four-year low in January, hit by President Trump’s tariff threats, strains in international relations after his push to acquire Greenland and immigration turmoil in Minnesota.

The dollar later surged to a 13-month high in late June. MarketWatch tied the rebound to the U.S. and Israel attacking Iran in late February, a move that sent oil prices higher as markets braced for possible damage to global crude supplies.

Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management, told MarketWatch that he does not expect a rate increase this week. He said the Fed still faces a question over whether it acts sooner than expected to restrain inflation concerns before they require stronger action later.

Schutte said any further dollar strength helps on inflation and that markets have done some of the Fed’s tightening work by lifting financial pressure. He added that whether the move is enough remains the central issue.

Eric Wallerstein, chief macro strategist at Clocktower Group, told MarketWatch the dollar’s strength reflects foreign interest in U.S. assets, helped by strong equity-market performance and capital inflows, rather than acting chiefly as a deterrent to inflation.

Wallerstein also said Fed staff track dollar strength and its likely pass-through to inflation. Still, he told MarketWatch that imported goods account for a relatively small share of U.S. production costs and consumer spending.

He said the link between import prices and inflation is weaker than in past decades because of U.S. energy independence, changes in wage-setting and a shift toward a more services-focused economy.

What does Trump want from the dollar?

MarketWatch reported that Trump said in January he welcomes a weaker dollar as part of his effort to reduce U.S. trade deficits and debt. A weaker dollar can make U.S. exports cheaper abroad while making imports costlier, which can favor domestic production.

The White House and Treasury Department did not immediately respond to MarketWatch requests for comment.

The federal debt now exceeds $39 trillion, according to Treasury Department fiscal data cited by MarketWatch. A stronger dollar can make Treasury securities more attractive to foreign investors because they need dollars to buy U.S. debt.

MarketWatch reported that Trump has pushed for lower interest rates since returning to office last year, though the Iran war and other White House decisions have complicated the path to lower rates in 2026.

U.S. stocks ended mixed Tuesday, according to FactSet data cited by MarketWatch: the S&P 500 rose 0.2%, the Nasdaq Composite slipped 0.2% and the Dow Jones Industrial Average gained more than 1%.

This story draws on original reporting from MarketWatch.