The Hassett drift begins: The Dollar finally loses its nerve

The Hassett drift begins?

The greenback is finally blinking. After a week of stubborn, almost mechanical resilience — even as markets restored December cuts back to baseline — the dollar is drifting lower this morning as the “Hassett effect” begins to seep into the bloodstream of global FX. What had looked like stubborn USD strength is suddenly softening around the edges, not because of shocks or liquidity squeezes, but because the dollar has finally started to trade in line with its own rate curve again. A currency priced for a cautious Powell is now being forced to imagine a Fed led by an über-dove who openly says he’d be cutting rates right now. Once that possibility is floated over the market like a trial balloon, valuation dislocations can’t stay hidden.

The repricing is not dramatic — it’s a quiet release of pressure — but in FX, these quiet releases often mark the start of real, durable moves. The USD had been running too rich versus its short-term rate differentials, insulated by geopolitical hedging, thin holiday liquidity, and leftover year-end flow geometry that kept the dollar glued to altitudes it didn’t deserve. But the glue is now softening. The first wave of selling is orderly and measured, almost elegant — the kind of soft exhale that tells you the market is adjusting to fundamentals rather than reacting to fear. When currencies shift because the curve compels them to shift, they tend to keep moving.

The macro backdrop is helping the repricing along rather than initiating it. Yesterday’s retail sales were weak, and consumer confidence plunged straight into the tank — data that didn’t shock the market so much as reinforce the idea that the growth pulse is cooling just as the Fed faces one of its most politically charged transitions in years. There is nothing in this data that strengthens the dollar; everything in it simply affirms the dovish drift already taking shape. With Williams, Waller and Daly softening the December narrative and Hassett looming as a rate-cut crusader who would pull the policy lever hard if given the chair, the dollar no longer has a hawkish backbone to lean on.

This is where the valuation story becomes critical. EUR sat nearly 2% cheap versus fair value yesterday, and that mispricing wasn’t a euro problem — it was a dollar problem. The same undervaluation was visible across the DXY, all held down by the USD’s artificial resilience. With today’s FX tone shifting and the greenback finally bending to its own rate gravity, those valuation gaps are starting to narrow. EUR/USD doesn’t need European catalysts; the USD leg alone can pull it over the 1.1600, and that is precisely how medium-term FX trends are born — not from fireworks, but from one currency quietly losing its privilege.

The microstructure supports this interpretation. Implied vols are contained, risk reversals are tilting gently toward USD puts, and positioning is light — creating a smooth runway for the dollar to drift lower without tripping over squeezes or disorderly adjustments.

The broader narrative is simply shifting. For the first time in weeks, the curve, the valuation models, the political optics, the speaker slate, and the price action are all leaning in the same direction. That does not guarantee a sweeping USD drawdown, but it removes the supports that had been artificially propping the currency up. The market is beginning to behave as though a deeply dovish Fed — and potentially a radically dovish Fed chair — cannot coexist with a dollar priced for higher-for-longer. Traders don’t need confirmation; they only need a plausible alternative future to begin marking prices toward it.

Today’s move is subtle but decisive. The dollar isn’t cracking — it’s normalizing. But normalization is dangerous for a currency that has been defying its fundamentals. If the Hassett trial balloon continues to float above Constitution Avenue, the USD’s downside risks won’t just stay alive — they’ll become actionable. And that is exactly what we’re beginning to see now.