FX alert: Dollar at the cliff’s edge

Unusual times at the Fed

The dollar is pressed up against the cliff, staring into the void, but gravity hasn’t yet taken charge. Yields at the short end have collapsed since August, payroll revisions wiped almost a million jobs off the books, and inflation prints have softened just enough to hand Powell cover for easing. On paper, the greenback should already have slipped into the ravine. Instead, it clings stubbornly to the ledge, balanced on cracked rock, refusing to fall.

Markets are hesitant to give it the final shove. Just 26 bps are priced for this week’s FOMC, and 70 bps by December. Without a surprise 50 bp cut or Powell opening the door to bigger moves if the labour market buckles further, there’s no trigger for a deeper drop. The Fed’s policy rate still hovers well above its neutral estimate, acting like a branch snagging the dollar’s sleeve and stopping the fall. For traders, the “real” short-dollar moment still lies ahead — in the next NFP, where another weak print could finally collapse the ledge.

USD/JPY is staring at its own cliff edge. Narrower yield spreads should have weakened the pair already, but Tokyo politics have turned the ground beneath into shifting gravel. The latest Yomiuri polling put Sanae Takaichi (29%) and Shinjiro Koizumi (25%) as the frontrunners for the next LDP leader, with Koizumi even edging Takaichi among core LDP supporters. Instead of clarity, the succession race has clouded the outlook and left Ueda cautious. That uncertainty mutes the BoJ, muffles rate-hike chatter, and keeps USD/JPY pinned on the edge — not falling, not climbing, just waiting for the next stone to give way.

The picture shows two cliff faces. The dollar, heavy with its own contradictions, waits for labour data to shake it loose. USD/JPY, caught in political fog, sits just as precariously. The edges are crumbling, the abyss is visible, but both hold on — for now. Traders can see the fall, but timing it is the harder trade.

These are unusual times at the Fed, but for me, it’s still a time to lean short the dollar — even if I believe the real move to 1.20 EURUSD and sub 145 USDJPY comes with NFP. There’s enough in the air to rattle dollar confidence ahead of it, and Wednesday’s FOMC could deliver not just policy, but theatre.

Imagine the first-ever four-way split in Fed history: 2/3 vote for 50 bps, the rest for 25 bps, and then the shock headline — Lisa Cook flipping from uber dovish, casting a 25 bps vote to spite Trump. That isn’t monetary policy; that’s political spectacle.

Markets would sniff it out immediately. A split this fractured tells us the Fed’s center of gravity has broken — not a steady compass but a political fault line running through the room. Yes, the median outcome still delivers 25, but the optics would matter more than the action.