The sell-America kool-aid

The dollar was treated yesterday like a cracked hull in a storm, but the market has a habit of mistaking noise for structural damage. We are not chasing this sell-off. If anything, the tape reads more like a temporary air pocket than the start of a lasting descent.

The catalyst was imported volatility rather than homegrown weakness. Japanese government bonds detonated first, exporting yield shockwaves across global fixed income. That spillover rattled nerves and triggered a reflexive liquidation of US assets. When long-end yields jump abruptly, currencies tethered to fiscal credibility tend to wobble first. That is why the dollar, sterling, and yen were the three worst performers on the day. This was not a classic risk-off script. It was a balance sheet anxiety trade.

What stood out was Sterling’s behaviour. It underperformed even high beta currencies like the Norwegian krone and the kiwi. That tells you everything. This was not about growth optimism evaporating. It was about markets ranking sovereigns by perceived fiscal resilience. When yields rise fast, the spotlight swings to debt dynamics, not carry or cyclical exposure.

But here is the pivot point, the market is already starting to digest. The JGB sell-off has paused. Long-dated Japanese bonds rebounded sharply after local Tokyo banks leaned into the rout, removing, albeit temporarily, one of the key pressure points that fed dollar weakness in the first place. US Treasuries look steadier. Equity futures are green. The feedback loop that drove the triple sell of U.S. dollar stocks and bonds is loosening.

That matters because yesterday’s move had the fingerprints of a positioning purge rather than a regime shift. The dollar’s 0.8 percent drop was its largest one-day fall since last summer when the Fed openly tilted toward rate cuts. Yet today the Fed pricing has not budged. March cut expectations are still barely alive. The front end has held firm. That tells you the market does not believe US monetary credibility is under threat. This was about sentiment whiplash, not policy erosion.

Greenland was the headline risk that turned unease into action. The fear narrative ran ahead of reality. The idea of Europe dumping US assets en masse makes for a dramatic storyline, but it collapses under practical constraints. A small Danish pension fund exiting a modest Treasury position is executable. A large-scale European retreat is not. There are not enough deep alternative pools to absorb that kind of flow without severe dislocation. History backs this up. The post-Liberation Day episode last year saw heavy selling one month, followed by record inflows the next. Capital protested, then returned.

This is also an election-year dynamic. The market has already learned that sharp financial backlash can force fast reversals. Yesterday’s price action had the same self-inflicted feel. That cuts both ways, but it also caps the tail risk. Before heading to Davos, Trump signalled exactly that optionality by saying there is room to work something out. Face-to-face diplomacy has a habit of sanding down sharp edges, and Davos is built for that theatre.

If tensions cool even marginally, the dollar quickly finds its footing. Seasonal dynamics favour it. Front-end yields will again reprice hawkishly. And without another leg higher in bond volatility, the incentive to fade the greenback grows. In that setup, euro strength looks vulnerable. A return below the mid-1.16s is entirely plausible once the geopolitical premium starts to leak out of the price.

None of this dismisses the underlying risks. Japanese fiscal clarity is still lacking. The long end there remains fragile, and yen risks are skewed lower if bond selling resumes. But for now, the market is mistaking a tremor for an earthquake.

This was a scare trade, not a structural unwind. When the dust settles, the dollar still looks less like a sinking ship and more like a vessel that briefly took on water, patched the leak, and kept sailing.