FX alert: The Dollar’s second wind: When the world’s troubles become Its tailwind

The greenback has that unmistakable swagger again — the kind that only comes when the rest of the world looks a little more uncertain. Two months after sinking into post-FOMC malaise, the dollar has hauled itself off the mat and is now within striking distance of the 99.000 handle, having clawed back nearly 3% since the mid-September trough. This isn’t so much about U.S. strength as it is about the rest of the world losing its footing — a classic “ugly contest” where the least bruised currency wears the crown.

Markets are rediscovering an old truth: the dollar doesn’t need to be virtuous to rally; it just needs everyone else to look worse. The ongoing U.S. government shutdown — a headline that would usually chip away at US market confidence — has barely made a dent. Instead, traders are watching Japan and Europe stumble through their own brand of political and economic fragility, and that has been all the oxygen the dollar needs to turn defensive positioning into a full-blown comeback.

In Tokyo, the yen has been stuck in a political typhoon. With Sanae Takaichi poised to become Japan’s next prime minister, investors sense a return to the “reflationist” instincts of old LDP playbooks: fiscal largesse, easy money, and a quiet nod to keeping yields anchored. USD/JPY sliced through resistance like a hot knife through tempura, tapping a fresh high of 152.50 + — a level that leaves traders jittery about what might come next. The yen’s five-day losing streak tells a story of deep uncertainty, amplified by coalition tremors within Komeito and whispers of realignment with smaller centrist factions.

For Tokyo’s bond desks, this mix of political flux and soft data is an uncomfortable cocktail. Labour cash earnings slid sharply from 3.4% to 1.5% — a hangover from bonus distortions, yes, but one that reaffirms that real wage momentum isn’t breaking out. With that, the BoJ’s slow-motion exit from ultra-easy policy looks delayed once again. The market now sees Ueda’s caution not as academic prudence but as a survival instinct — the kind that keeps traders from stepping too close to the fire when the political winds are shifting.

Meanwhile in Europe, the euro is discovering that political theatre can be every bit as corrosive as weak data. What began as a deadlock in France has morphed into a slow-motion leadership crisis. Prime Minister Lecornu’s attempts at coalition salvage are unraveling, while Macron’s former allies now speak of resignation gambits and “obstinacy in clinging to power.” This kind of domestic spectacle doesn’t just weigh on approval ratings — it seeps into markets, undermining confidence in Europe’s ability to hold its fiscal center. EUR/USD is now flirting with the 1.1600 line, testing the same support range that’s been a psychological floor all year.

And then there’s Germany — Europe’s supposed engine — coughing again. Industrial output slumped a sharp -4.3% in August, brushed off by optimists as “holiday closures and production changeovers,” but traders know better. When factories go quiet and inventories pile up, it signals not just cyclical fatigue but tariff drag — the unseen tax of geopolitical friction now pressing on the continent’s export core.

The result is a landscape where the dollar looks less like a runaway locomotive and more like a well-built lifeboat drifting through other nations’ storms. Every time Europe or Japan experiences political tremors, the DXY gets another gust of tailwind. A cynic might call this a “fear bid.” A trader calls it flow — capital migration driven by perceived safety, however ironic that may seem in a country where the government itself is partially shut.

The dollar’s resurgence, then, isn’t about optimism. It’s about contrast — about how in a dimly lit room, even a flickering bulb looks bright. Until Tokyo’s political fog clears and Paris rediscovers its footing, traders will keep buying dollars not because they want to, but because they can’t see anywhere else to hide.