The Dollar’s glass jaw: From reserve king to risk asset

The dollar stumbled into the week like a prizefighter still dazed from April’s tariff slug-fest. Trump may have pirouetted away from the 50 % EU levy, but the greenback is trading as though the ref never rang the bell. Tariffs have been mentally filed under “last month’s chaos,” yet the market now treats every new deadline extension as proof the trade-deal timetable is written in disappearing ink. When headline risk is that fickle, the dollar takes the punch—every time.

My short-term fair-value model still shows DXY wearing a 4.5 % discount to the euro and 3.5 % to the yen, but that neat arithmetic is irrelevant while the currency behaves like it lost its G-10 passport. Investors are scanning fiscal balance sheets, monitoring auction bid-covers and bracing for policy curveballs the way they would with an EM unit, not the world’s reserve asset. The decoupling is stark: the 60-day correlation between 10-year Treasuries and DXY started 2025 near 0.70 and has dissolved to zero. Until recession chatter fades—and Treasury supply finds eager hands—the dollar’s footing stays shaky.

That leaves the data docket to play savior. A Conference Board confidence bounce back above 90 could scrape some worry off the tape; sub-90 prints merely confirm the soft underbelly. Durable goods should retrace the freak-strong March print, and Thursday’s PCE deflator will have to under-shoot to keep “stagflation” scribbles off trading screens. Thin Monday liquidity masked nothing; now that the U.S. and U.K. desks are live, direction will be earned, not drifted.

A retest of the 98.50 DXY floor in this set-up carries longer odds than a sprint + 100. I’m not loading the clip for a bold call either way—the tape is too noisy—but my EURUSD longs are still on, while USDJPY shorts were jettisoned when JGB long-end carnage made that wager feel like standing in front of a chainsaw-wielding Widowmaker.

The single currency, meanwhile, keeps whistling past its own graveyard. EURUSD pierced 1.1420 in holiday trade and barely blinked. Lagarde’s talk of a “global euro moment” poured jet fuel on the narrative of Europe minting the next reserve darling. Yes, a deeper common-debt market would turbocharge the story, but Brussels still quibbles over how often to pass the hat, and exporters are already howling at the strong-euro moon. Markets love the dream; politicians still need to print the bonds.

I’ll trade the dream when it’s funded.

One more headlines-driven squeeze could loft EURUSD through 1.1450, but up there I’m a seller, expecting gravity—and eurozone politics—to reclaim the chart. Summer congestion around 1.1250 still feels like the magnet once deficits, auctions and U.S. growth readings nudge the dollar back toward its fundamental marks. Until then, we’re all tossing spaghetti at the wall and calling it fundamental analysis—just remember to yank the plate away before the sauce stains your P&L.