Dollar drifts lower as the Euro whistles past French political turmoil

The Dollar is softer, not collapsing, but caught in that familiar downward drift again — and this time the slide is tethered to the slow unravelling of the U.S. labour market narrative. The benchmark revisions due later today are now the fulcrum of the FX market, because they will decide whether the jobs story the Fed has leaned on was genuine strength or a padded illusion. Christopher Waller already laid down the warning: payrolls may have been overstated by as much as 60,000 a month. That leaves consensus braced for a downward revision of roughly 700,000 jobs through March. That’s no rounding error — it’s a direct hit to the Fed’s “solid labour market” premise. If the revision mirrors last year’s shock of –818,000 or worse, the dollar is primed for another leg lower as traders push front-end pricing more aggressively toward jumbo 50bp cut assumptions. And with CPI looming just ahead, that print could become the real “truthsayer” for whether those jumbo bets stick or fade.

This is bigger than the data print itself—it’s about credibility. July and August payrolls already cracked the façade, and today’s revisions could widen those cracks into something more systemic. Traders who thought they were managing risk are discovering they may have been positioned on the wrong side of the story altogether, with the Fed forced to recalibrate policy on data it can no longer trust.

The euro is a case study in how markets choose their battles. On the surface, French politics is collapsing again: Bayrou resigned after losing his confidence vote, parliament is fractured, and the spectre of early elections looms over Macron’s presidency. Usually, that kind of instability would weigh heavily on the single currency. Yet EUR/USD is whistling past the French political graveyard, shrugging off the noise because the real driver sits across the Atlantic—the sharp drop in short-dated U.S. yields. Political instability may rattle OAT spreads, but the FX market is taking its cues from basis flows, not from parliamentary squabbles. And as long as Macron’s presidency anchors the Fifth Republic, traders don’t see French politics as a systemic risk. The euro has every excuse to climb, and the dollar every reason to sink. Though the pair may stall near 1.18 to test the rarified air, the larger gravitational pull is toward 1.20 as multi-month look-ahead positioning shifts unfold.

The yen has also found firmer footing, and at first glance, it shouldn’t have. Sanae Takaichi, the frontrunner to replace Ishiba, is an ideological heir to Abenomics—fiscal largesse, ultra-easy BOJ policy, steeper JGB curves, and traditionally a weaker yen. But Japan isn’t Abe’s era anymore. Inflation has changed the political and social climate. Voters are less willing to accept sugar-rush policies that weaken household purchasing power, and the LDP itself may hesitate to give Takaichi the reins. That gap between the old script and current reality is why yen bulls are leaning in amid the gap lower in UST 2-year yields. Yet with succession risk still hanging in the air like a stale stench, the USD/JPY downside looks based. No point getting greedy on the short side when the politics are still muddy.