Friday forex follies: Dollar dented, Yen resurgent, Euro poised

The dollar kicked off the week with a bounce, riding high on Monday’s U.S.–China trade detente. But the momentum didn’t last. As the euphoria faded and traders refocused on the underlying softness in U.S. data, the bid quickly evaporated. USD/JPY gave up all its early-week gains, closing out the week right back at square one.

The price action in the pair tracked U.S. front-end rates almost tick for tick. The 2-year Treasury yield, which spiked 15 basis points on the initial trade optimism, has now nearly fully unwound, reflecting a market that’s walking back any notion of hawkish follow-through. What began as a geopolitical bounce has turned into a reality check on U.S. growth and rate path expectations.

The reversal wasn’t a mood swing—it was data doing the heavy lifting for the yen. This week’s U.S. economic releases weren’t a disaster, but they told a clear story: the engine is cooling. The control group in retail sales unexpectedly fell -0.2% m/m, versus a forecasted +0.3%, while both CPI and PPI undershot across the board.

This wasn’t just noise—it was a direct hit to policy trajectory assumptions. The dollar didn’t bleed because sentiment shifted—it dropped because the macro math changed, and with it, the market’s conviction in a “higher for longer” Fed stance.

The Fed easing narrative is no longer the fringe trade—it’s back in focus. The market isn’t leaning aggressively into cuts yet, but the door is clearly open. The OIS curve has adjusted lower, and while odds for a pre-September cut still sit below 50%, that could shift quickly with just one or two more soft reads.

USD/JPY, in particular, has lost its upside edge. With the Fed story shifting and Tokyo desks more inclined to buy the yen on any weakness, we see the path forward as a capped dollar upside and growing downside risk. The pair’s failure to sustain Monday’s gains despite a trade truce bounce tells you all you need to know: buyers are fading, and real money is quietly building defence.

The euro, meanwhile, continues to climb the wall of dollar weakness. While eurozone macro news was mostly second-tier this week, the data held up—industrial production surprised to the upside, and the ECB rate-cut roadmap remains intact but gradual. EUR/USD has stabilized above 1.120 and looks poised to drift toward 1.130 if the U.S. soft data trend continues.

Today’s only real potential flashpoint is the University of Michigan sentiment release. Inflation expectations will be the focus, but with last month’s upside spike still fresh, traders are cautious. The sample size and political noise in the survey data make it unreliable, but a downside surprise in inflation expectations could reinforce the dovish pivot narrative—and accelerate the dollar’s slide.

Under the surface, the pressure is building. The dollar’s inability to hold gains despite earlier rate repricing and geopolitical easing signals that the balance of power is shifting. Momentum is draining from the greenback, while positioning and sentiment are leaning increasingly short.

Bottom line

This wasn’t a dramatic week—but it was a decisive one. The dollar’s top-end looks done, the yen is stalking from the shadows, and the euro is grinding higher in the vacuum of U.S. policy credibility. The FX market is entering a recalibration phase, not a crisis—yet this is exactly where medium-term trend trades are born. If next week brings more soft U.S. data, expect the dollar to stay on the defensive, and for traders to keep rotating out of the world’s reserve currency in search of something with traction.