FX alert: The Dollar’s grip loosens, Euro holds its nerve, and Japan delivers its bazooka

Euro holds its nerve

Despite 1.1500 dangling like a trapdoor, the euro somehow walked through the hawkish fire onslaught without singeing its boots. In any other cycle, a set of FOMC minutes that snuffed out December rate-cut hopes and a firm US jobs print would have cracked the euro’s ribs. Instead, the tape behaved like a market that has already front-loaded the dollar’s bullish narrative and is now simply rotating the chessboard pieces rather than tipping it.

The move in US rates told the story: front-end yields fell five basis points on a robust headline jobs number. That isn’t a market doubling down on a hawkish Fed—it’s a market saying positioning is no longer short-dollar enough to panic. Even the 3.7% intraday puke in US equities failed to resurrect the dollar bid. It all echoed the Fed’s own worry in the minutes: US consumption is being levitated by a thin slice of wealthy households surfing the equity-wealth effect. When your growth engine is that narrow, misfires hit harder.

But the real signal: the easing cycle pricing barely budged. The terminal rate for 2026 is still orbiting 3.00% and the timing has merely slid, not evaporated—January now carries 24bp of cuts priced versus 10bp for December. That’s not a hawkish reset; that’s a timetable tweak. And with Kevin Hassett—currently the political lightning rod at NEC—priced as the frontrunner for the Fed chair, the dollar is wearing a small but persistent “institutional independence risk premium.” When the man markets believe could lead the Fed publicly says he’d “cut rates right now,” the FX market listens.

So the DXY sits at the top of a five-month range, but only because USD/JPY has dragged it there like an anchor chain. Strip out the yen, and the dollar feels less ironclad—and dangerously vulnerable to a Japanese intervention volley that could release up to $100bn in liquidity into the spot market. We are now close enough to the line where Tokyo FX desks can smell blood—and Tokyo’s trigger finger twitches when USD/JPY noses toward 159–160.

Japan delivers its bazooka

Japan finally delivered the long-telegraphed fiscal bazooka—JPY 21.3 trillion in total, with JPY 17.7 trillion in real, boots-on-the-ground spending—and for all the breathless buildup, the market reaction feels like a trader who has already seen the movie and is now just grading the credits. The 30-year JGB had already blown out to a record 3.41% in November, a 35bp moonshot since late October, as the market pre-traded the fear of a massive issuance wave. So today’s softening in yields isn’t enthusiasm—it’s relief. The budget may be significant, but so far it’s not the issuance nightmare the bond market price action had been whispering about.

What really soothed the long end was the structure of the package: nearly JPY 12 trillion aimed directly at price suppression—energy subsidies, electricity and gas support, and even scrapping the gasoline tax. This is fiscal stimulus masquerading as disinflation. Japan is literally paying to push CPI down by an estimated 0.7pp between February and April next year. It’s an approach straight out of the Japanese playbook: use the budget to neutralize the very inflation the BoJ claims to be “monitoring,” giving the central bank political cover to stay dovish. Real rates sink even deeper, and the yen—ironically—gets a short-term boost because the bond market no longer sees yields spiraling into the stratosphere.

The package also has its geopolitical fingerprints: JPY 1.7 trillion earmarked for defence spending acceleration as Tokyo sprints toward the 2% of GDP target two years ahead of schedule. But the real fog lies in the accounting. This is Japan—where fiscal arithmetic is an interpretive art form. Despite the package being larger than last year’s supplementary budget, the government insists JGB issuance will be lower than the previous year’s JPY 42.1 trillion. They may not be bluffing—stronger tax revenues genuinely help—but until the dust settles, no one truly knows. Japan’s fiscal structure allows enough cross-pockets, reserve funds, and offsets to confuse even seasoned JGB traders. Last year’s extra budget needed JPY 6.7 trillion of incremental issuance; this year could land anywhere from similar to meaningfully less, depending on how the Ministry of Finance shuffles the deck.

Against that backdrop, the yen is finally showing some teeth. Falling JGB yields take away one of the more aggressive bearish catalysts, but the more powerful driver is verbal intervention shifting up a gear. Finance Minister Katayama’s language moved from standard boilerplate to a more deliberate “deeply concerned” tone—Tokyo’s diplomatic code for “we’re warming up the intervention engines.” With the MoF openly stating it will “respond appropriately,” the bar for action is now lower, not higher.

Add in the US equity bleed, the softening in US 2-year yields, and the broader risk-off tone, and the yen finally gets to unwind some of the panic selling that pushed USD/JPY toward the high 158s. This is less about a structural yen turn and more about taking the heat out of a one-sided move. But for now, short-yen traders are suddenly looking over their shoulders—because Japan has reminded the market that even in a world of bloated debt and negative real rates, Tokyo still knows how to pull liquidity out of the sky when the currency hits the danger zone.

Oil glut

Oil extends its slide as the geopolitical overhang suddenly feels less combustible. The tape has been trading like the market is finally willing to price a world that isn’t permanently on fire. With Zelenskiy signalling openness to a US–Russia-drafted peace framework—however imperfect and however improbable—energy traders instinctively faded the geopolitical bid. Brent sinking toward USD 63/b and WTI slipping sub-59 is the market’s way of saying: “show me escalation, or I’ll keep leaning on oversupply.” Even if the European diplomats are gritting their teeth at the idea of Ukraine ceding territory, any hint of a thaw adds supply risk back into the mix at the exact moment the physical market is already staring at swollen barrels into 2025–26. OPEC+ is nudging production higher, US supply keeps creeping, and now the politics might be loosening the spigot rather than tightening it.

The sanctions dimension makes the picture even murkier. Washington’s impending hammer on Rosneft and Lukoil risks leaving 48 million barrels of Russian crude loitering at sea, a kind of floating limbo that underscores how fractured global crude flows have become. India’s Reliance sniffing around for alternatives is as clear a tell as you’ll get that Russian barrels are losing some of their untouchable status. The market is repositioning ahead of a reshuffled trade matrix, and the question for early next year is simple: do peace talks gain enough traction to restore barrels to market just as the world is already overfed? If that happens, oversupply isn’t just a headwind—it becomes the entire macro regime for oil into 2026.

Gold fade

Gold, meanwhile, is giving back more shine after its runaway moonshot. Drifting toward USD 4,000/oz and down roughly 0.5% on the week, the metal is merely exhaling after last month’s vertical lift. The mixed US jobs print didn’t hand gold bulls any fresh ammunition—stronger September hiring paired with rising unemployment and a Fed that clearly isn’t in a hurry to cut leaves the December meeting too ambiguous for conviction. With December cut odds now hovering around 40%, the higher-for-longer backdrop acts like a steel anvil on the metal after a record-breaking sprint.

But big picture: gold is still up an astonishing 55% year-to-date, its strongest annual gain since 1979, driven by the trifecta of massive ETF inflows, relentless central bank buying, and an ongoing migration out of sovereign debt and fiat currencies. The recent rally may be stretched, but the structural bid hasn’t gone anywhere. This week’s softness is a wobble, not a regime change—the metal is merely “re-pricing altitude,” not abandoning the climb.