The dollar was looking stronger heading into the Federal Reserve's July 29, 2026 meeting, according to MUFG Research's daily currency report published July 28 (MUFG Research). A brief dip in the dollar had already faded, and the currency was recovering as traders prepared for the Fed to hold interest rates steady — while hinting it might raise them later.

That hint matters a lot. When the Fed leaves rates unchanged but signals that more rate hikes could come, it's called a "hawkish hold." Think of it like a landlord who isn't raising your rent this month but makes clear they might next time. The Fed did exactly this at its June meeting, and the reaction was immediate. Reuters reported the dollar hit a one-year high on June 18 as bets on future rate hikes climbed (Reuters). CNBC confirmed the same move, noting the hawkish hold led traders to position for additional hikes (CNBC).

Lee Hardman, a senior currency analyst at MUFG, was quoted by both outlets. His takeaway: the Fed's refusal to declare victory over inflation, even while pausing, was enough to keep the dollar strong.

That view fits MUFG's broader thinking on interest rates. In a June 18 update, the bank noted that inflation expectations kept falling while real rates stayed high (MUFG Research). Real rates are interest rates after you subtract inflation — they show the true return a lender or saver gets. When real rates are high, money tends to flow into that country, boosting its currency. MUFG said directly that this combination kept the dollar strong and supported long-term Treasury yields. Those are the returns on government bonds that mature in 10 years or more, which reflect what investors think about long-term growth and inflation rather than what the Fed does this week.

The July 28 report suggests nothing fundamental has changed. The earlier dollar sell-off didn't last. Going into the Fed meeting, traders expected the same move: hold rates steady, but keep the door open to future hikes if the data calls for it.

But there's a new wrinkle. On July 24, MUFG published a report on inflation risks tied to oil prices returning to $100 per barrel (MUFG Research). When oil gets that expensive, it eventually pushes up the cost of goods and services across the economy. That could make the Fed's job harder if energy-driven inflation picks up again, even while other prices are cooling down.

This is where the tension builds. On one side, falling inflation expectations and high real rates support the dollar and long-term bond yields. On the other, an oil shock at $100 brings inflation risk back into the picture. That could force the Fed's hand — either backing up its cautious stance or pushing it toward raising rates sooner than expected.

For currency traders, the dollar's strength already reflects the expectation of a hawkish hold. That makes the situation risky in an uneven way. If the Fed surprises everyone with a softer tone — even a subtle wording change in its statement or in Chair Jerome Powell's press conference — the dollar could drop sharply. But if the Fed repeats its hawkish hold and acknowledges oil-driven inflation risks, the dollar would likely climb further.

The bigger question is whether oil prices will stay at $100 or fall back down. The fact that MUFG wrote an entire research note about it suggests they see $100 oil as a real risk, not just noise. If energy prices stay this high into August's economic data, the steady decline in inflation expectations that has been supporting the dollar could face its first real test.