The Dollar’s revenge tour

What began as a routine short-covering flurry has now taken on the air of something larger—a sort of Dollar Redemption Arc, temporary or not. The DXY has not just poked above resistance—it has planted its flag on both the 50- and 100-day moving averages for the first time since the dollar bear narrative took hold earlier this year. For traders who spent months leaning into the “peak dollar” thesis, this close above the 100-day isn’t background noise. It’s a regime reminder.

The underlying irony? Not much actually happened. The U.S. 10-year yield barely twitched. The S&P 500 slipped 0.3%. There was no grand macro revelation, no blockbuster data. Just a quiet session where momentum traders looked around, realized positioning was skewed, and started trimming. It was a positioning clean-out masquerading as a policy shift. FX, as usual, got the memo first.

Across desks, the conversation has shifted from “why is the dollar falling?” to “how much short exposure do we still have left to unwind?” The euro and yen have both been collateral damage—partly because Europe’s industrial heart is now sputtering like an engine low on oil (Germany’s industrial production cratering 4.3% month-on-month didn’t help), and partly because Japan is still mired in political musical chairs that make investors nervous about where policy coordination goes next.

Yet calling this move “fundamental” is a stretch. The U.S. data pulse hasn’t changed much. If anything, the Fed narrative is still anchored in the same cautious, insurance-cut logic that’s been in play since the summer. John Williams’ comments reinforced the script—acknowledge downside risks to employment, nod politely to the inflation softening story, and quietly hint that the Fed can cut again without losing credibility. The OIS curve, now just 5bps shy of pricing in two more cuts this year, suggests the market’s not buying yet buying any thought of a one-and-done sequel for 2025.

Still, beneath the surface, there’s a fascinating structural story brewing around the labor market. The Dallas Fed blog quietly dropped a data bomb: the monthly “breakeven” number of jobs needed to keep unemployment steady has collapsed—from 250,000 last year to just 30,000 now. The culprit? ( Distortions we have been writing about recently) Demographics, immigration freezes, and declining participation. It’s a reminder that slower job growth doesn’t automatically mean weakness. Fewer workers are simply available. In trader terms, it’s not a soft patch—it’s a supply curve shift.

This nuance matters enormously for the Fed. If the labour market is re-equilibrating because of demographics, not demand destruction, then cutting too aggressively risks overshooting—stimulating an economy that’s not actually slowing. Payrolls are decelerating, but claims haven’t budged, GDP’s still buoyed by AI-era investment, and there’s no hard landing in sight. It’s the kind of environment where the Fed could end up chasing phantom risks.

That’s why this dollar rally has a self-fulfilling quality: the more traders chase momentum, the more shorts get squeezed, and the more the DXY defies its own fundamentals. Safe-haven dynamics add another layer of irony—EUR, JPY, and CHF all look too messy to play that role, so the dollar gets its shine back almost by default. Gold’s run tells us that capital is still seeking ballast, but the USD has regained its reputation as a “reliable volatility sponge” for now.

For now, however, this strength appears tactical, rather than structural. The next big test comes with CPI next week. A 0.3% core print will all but confirm an October cut, but the real question is whether it’s warm enough to cool December. The U.S. government shutdown has conveniently paused the flow of bad data, gifting the dollar a little narrative oxygen—but that can change quickly.

Elsewhere, the Canadian dollar faces its own balancing act. The loonie’s correlation with the USD has insulated it somewhat, but with unemployment creeping toward 7.2% and an October rate cut now seen as a coin toss, that protection looks thin. Unless Ottawa’s recent diplomatic smoothing with Washington turns into real economic coordination, CAD could lose its tether.

Back in Europe, the euro’s brief sigh of relief from Macron’s pending PM announcement has already faded. The OAT-Bund spread tightening into the low-80s gave EUR/USD a momentary lift, but the market still senses fragility. Fiscal credibility remains the real currency, and traders remember the post-Truss and Italian cautionary tales all too well. Unless front-end spreads decisively widen in favor of the dollar, dips below 1.1500 should still attract buyers looking to reload on value.

And in Tokyo, the yen’s political subplot remains the market’s favorite soap opera. USD/JPY’s flirtation with 153.27 before retracing speaks volumes about how intervention talk works as background noise rather than deterrent. Finance Minister Kato’s verbal jawboning can’t mask the reality that political instability—not Takaichi’s policies per se—is what’s been weighing on the currency. If the LDP and New Komeito can stitch together a coalition, we might finally see the yen catch its breath. But until then, it’s carry traders’ paradise—volatility’s low, spreads are fat, and everyone’s sitting back collecting coupons. This isn’t a trade I can fully endorse. I’ve never been one for chasing nickels in front of freight trains — especially when the VAR locomotive can appear out of nowhere, roaring straight down the tracks. Frankly, I don’t think this setup deserves anywhere near the attention it’s been getting.

Which brings us full circle: this is not a dollar renaissance. It’s a momentum echo. The DXY’s rally says more about market mechanics than macro conviction—a bout of forced sobriety after months of one-way bearish trades. Unless CPI or Fed rhetoric seriously recalibrates expectations, the dollar’s next act could just as easily be a plateau as a continuation. For now, though, traders are happy to dance with the one who showed up on the charts, even if the music’s just a little too loud for the fundamentals.