FX alert: Something's wrong with the plumbing

What should have been a quiet week of rate repricing and data drought has instead turned into a squall of credit ghosts, political theatrics, and misplaced havens. Somewhere between Powell’s soft pivot, Trump’s Kremlin courtship, and a regional bank bogeyman crawling back from the shadows, the greenback has lost its grip on direction.

The spark came from America’s own backyard. Zions and Western Alliance cracked open their loan books and found skeletons—fraudulent loans, bad collateral, and echoes of 2023’s SVB hangover. The market, forever superstitious, didn’t need a second reminder that “isolated incidents” tend not to stay isolated for long. The regional bank index fell five percent, and with it, the thin layer of confidence coating U.S. credit markets peeled away. Investors who’d been feasting on tight spreads suddenly felt their stomachs churn.

It’s as if the credit market had been running on borrowed calm, a magician’s trick where leverage hid behind illusion. Now, that illusion is breaking. The dollar, so often the beneficiary of fear, finds itself on the wrong side of it this time—punished by lower yields and whispers that maybe, just maybe, America’s balance sheet isn’t as unbreakable as the charts imply.

Treasury yields have slumped as traders wager on not just one, but possibly even a 50-bp Fed cut before year-end. That repricing alone would’ve been enough to bruise the dollar. But add falling oil prices—a seven percent slide this week—and that is flat out JPY and EUR positive from a terms-of-trade perspective. And flat out negative for the US, the world’s largest oil producer.

Over in Europe, the euro’s tailwind is more about dollar weakness than newfound strength. Still, political calm in Paris has helped remove a sliver of the risk premium that had been baked into French assets. Lecornu’s government survived the no-confidence test, trading fiscal discipline for short-term peace—hardly ideal, but good enough for markets hungry for stability. The OAT-Bund spread remains wide at 75 basis points, but that’s a plateau investors can live with as long as the roof doesn’t cave in.

All this leaves EUR/USD gliding toward the upper end of its recent range, flirting with the idea of 1.1800. Some of that is seasonal—the dollar often stumbles into year-end as managers reduce dollar exposures—but much is structural. The Fed is cutting i Energy isn’t inflating. Credit’s getting wobbly. And geopolitics, oddly enough, might deliver a peace dividend through the back door if Trump’s Moscow outreach gains traction.

None of it feels remarkably stable. It’s the kind of market where traders chase ghosts and fade their own convictions. For me, the cleaner expression isn’t in the euro—it’s in the yen.