The dollar has stormed into the second half of 2026 at its strongest half-year point in decades, riding a wave of anticipated US rate hikes and an artificial-intelligence investment boom that has pulled record capital flows into American assets. The currency is up 3% since January, touching 40-year highs against the yen and nearing year-highs versus the euro. In Buenos Aires, where the peso’s calm had been a hard-won stabilisation trophy, the dollar jumped nearly 5% in a few weeks of June, well above the monthly inflation pace, as corporate demand for dividend repatriation surged to levels not seen since capital controls were lifted a decade ago.

The mechanism is a widening policy divergence. New Federal Reserve Chair Kevin Warsh has kept the focus squarely on inflation, which remains well above the 2% target, and traders now price at least one rate increase this year with a coin-toss chance of a second. That hawkish tilt, amplified by an economy still generating positive data surprises and earnings beats, has drawn an unprecedented $341 billion into US equities so far this year, according to Bank of America estimates. Speculators have built a net long dollar position of around $30 billion, the fastest half-year accumulation since CFTC records began. In Frankfurt, the European Central Bank also raised its deposit rate in June, but the debate over further tightening is far more tentative. A fresh ECB consumer expectations survey released Friday showed median inflation expectations for the next 12 months falling to 3.5% in May from 4.0% in April, while three- and five-year expectations held steady at 2.9% and 2.4% respectively.

Yet the eurozone picture is not uniformly benign. Perceived inflation over the past 12 months remained stuck at 4%, the highest since July 2024, and chief economist Philip Lane warned that the end of the Middle East conflict alone would not be enough to bring price growth back to target. Lower-income households continue to report significantly higher inflation perceptions, and uncertainty, though declining, remains above pre-war levels. In Italy, headline inflation accelerated to 3.2% in May, driven by unregulated energy, transport and recreational services, even as food-price growth slowed. The ECB’s data-dependent posture, reiterated by President Christine Lagarde, leaves the door open to another rate rise if price pressures re-accelerate, but the current shock is judged smaller in magnitude than the previous inflation episode.

The impact cascades unevenly. Emerging-market central banks from Seoul to Mumbai have intervened or raised rates to defend their currencies against the dollar’s march, while Japanese officials have voiced alarm at the yen’s weakness. In Argentina, the government of Javier Milei views a moderately rising dollar as a necessary valve to avoid an overvalued exchange rate, but the acceleration in June is testing the limits of comfort: the central bank is simultaneously rebuilding reserves and managing a retail dollar demand that never fully sleeps. The next factual milestones are the Fed’s and ECB’s upcoming policy meetings, where the interplay of still-elevated core inflation and easing consumer expectations will determine whether the current rate trajectory holds or pivots.