FX alert: The Yen is in play

The dollar’s not exactly roaring, but it’s found its footing — and that says a lot in a week where Powell-bashing and tariff whiplash have been fighting for lead headline status. A rebound in U.S. equities lit the match. Still, the real floor under the greenback came from a positioning flush and a timely narrative shift from Treasury Secretary Scott Bessent, who tossed markets a trade-war peace pipe just as sentiment was starting to fray.

Let’s be clear: no G10 currency has a higher beta to trade noise than the dollar right now. Bessent’s remarks — calling the current tariff regime “unsustainable” and hinting at near-term de-escalation — were precisely the few USD longs needed to step in and clean up the oversold mess. Add in stretched positioning and Tuesday’s improved liquidity, and you had all the ingredients for a fast, flow-driven snapback.

That rally put a dent in the safe-haven trio — EUR, CHF, and JPY — which had been soaking up the “Fed chaos” bid while the dollar took its punches. But this bounce wasn’t about macro conviction; it was about positioning mechanics. And when USD flows stabilize, the unwind in short-dollar plays can be fast and brutal.

On the euro side, today’s PMI figures are expected to show a measured decline. Not enough to scream recession, but soft enough to validate the market’s dovish tilt — with 75bps of ECB cuts still priced in by year-end. A move below the 50 mark could weigh on the euro, but let’s not kid ourselves: EUR/USD remains a derivative of USD flows right now.

Zooming out, I’m still leaning tactically bearish on the dollar in the near term — the soft data has been relentless, and I think we’re on the cusp of that bleed-through into the hard numbers. That said, I’m no longer banging the table on EURUSD upside. The move played out quicker than I expected, and with the ECB already pre-cutting and eurozone sentiment stalling, I’ve shifted my focus. The pivot? Yen.

FX desks are starting to lean into a stronger yen narrative, with expectations building that U.S. negotiators will push Tokyo to address the yen’s persistent weakness as part of the upcoming trade talks. The dollar-yen looks vulnerable here, not just due to flows, but also due to trade-deal optics.

Keep an eye on the yen. Finance Minister Kato and Bessent are reportedly sitting down this week — and Tokyo’s not looking to escalate. If the U.S. backs off on tariffs and the BoJ keeps tiptoeing toward normalization, the "deal zone" for USDJPY likely falls between 120 and 130. Whether we hit 120 depends on how aggressively Team Trump handles the bilateral optics. I think you need to hedge this tail risk.

Bottom line? The dollar’s still in the ring — bruised, not broken. And with flow and noise still calling the shots, we’re likely in for a few more swings before the next clean break.