Payrolls and Tokyo politics push the Dollar toward its next crossroads

The Dollar stumbles into the new week, winded after last week’s breakneck sprint on strong U.S. data and less dovish Fed signals. The greenback’s fall back below the 98.00 level on the dollar index is less a collapse and more a reminder that momentum needs fuel. Friday’s PCE report, interpreted by the market as benign rather than menacing, provided no such spark. It came through more as a lukewarm cup of coffee — not unpleasant, but hardly the caffeine jolt the dollar needed to keep running. Instead of a catalyst, it turned into the moment dollar bears exhaled, and with rate cuts still in the picture, it is allowing the dollar’s recent rally to lose steam. The prospect of a government shutdown hangs around the edges like background noise — a nagging distraction, but not the sort of shock that turns traders’ compasses. Still, it adds to the sense that the dollar’s stride is uneven just as the market’s gaze shifts to this week’s true arbiter: jobs.

The Fed has made it clear — the inflation dragon is no longer the only beast in the cave. Now it’s labour weakness that keeps Powell awake at night. The market is being told in no uncertain terms: soft jobs equal softer policy, which equals a softer dollar. That turns the week into a three-act play: Tuesday’s JOLTS job openings, Thursday’s weekly claims, and the Friday climax of payrolls. But here’s the twist — Powell himself has said it may only take a trickle of +0–50k jobs per month to hold the unemployment rate steady. If payrolls surprise with a sturdier print, even modestly, it could reset positioning and lend the dollar a fresh second wind. For now, however, the street is leaning toward weakness — betting the Fed’s scalpel will keep cutting.

The yen has meanwhile seized the moment, tightening its grip just shy of the 150 handle. Last week’s failure to crack higher has emboldened yen bulls from a technical perspective, and political theatre in Tokyo is providing the subsequent injection of volatility. The ruling LDP leadership contest has the feel of a high-stakes card game where the deck is being shuffled mid-deal. Polls show Takaichi creeping closer to Koizumi, but the numbers are split, and Diet member support — the real chips in the pot — tilt heavily Koizumi’s way. Eighty Diet members in his corner versus forty for Takaichi paints a picture of quiet structural backing, even if headline polls flash noise. If it goes to a runoff, Diet votes outweigh the grassroots, tilting the scales back in favour of Koizumi.

Why should traders care who takes the LDP crown? Because the winner hands the Bank of Japan its political cover to act. A Koizumi victory would likely remove the fog of uncertainty, freeing the BoJ to pull the trigger on rate hikes as soon as October. Think of it as the referee finally blowing the whistle — allowing policy normalization to begin in earnest. The Tankan survey this week becomes another litmus test, a measure of whether Japan’s economy is braced to absorb higher rates while tariffs nibble at its edges. Overlay that with Noguchi’s remarks that the “need to adjust” policy rates is intensifying, and you have the outlines of a BoJ finally preparing to shift from words to deeds.

In short, the stage is set for a week where U.S. labour data and Japanese politics stand as twin pillars of market risk. The dollar sits at a crossroads: either hammered lower by weak jobs into a cycle of larger easing expectations, or re-energized by payrolls that remind everyone this economy still has a pulse. The yen, in turn, is waiting for the political dice roll that could finally embolden the BoJ. This is not just about currencies meandering within ranges — it is about narrative inflection points. A dollar that can’t regain footing ahead of payrolls risks cascading lower, while a yen bolstered by political clarity could carry momentum well beyond 150. Traders should keep their helmets buckled: this is the kind of week where a single data release or a party vote can flip the entire board.