Markets have a way of testing conviction, and right now the is the instrument everyone thinks they know but no one really trusts. For months, the bias has been short US dollar — a crowding that made sense while the Fed’s scalpel looked ready to carve out cuts.
But then the data arrived like a surprise inspection: final for Q2 revised up to 3.8%, consumption running healthier than expected, sliding back toward their lows, jumping, and even housing showing late-summer vitality. That string of upside surprises forced the rates market to shuffle its deck, lifting the two-year above 3.65% and nudging the 10-year toward 4.2%. The message was blunt: the U.S. economy isn’t rolling over on command.
The sell-off was less about geopolitics, despite NATO’s sabre-rattling headlines, and more about traders recognizing that being structurally short US dollars carries a price when the tape runs hot. Positioning got squeezed, and the US dollar found a tailwind that felt bigger than the sum of its parts.
But like any gust of wind, it may already be fading. The inflation print, expected to be a benign 0.2% month-on-month, could be enough to puncture the hawkish repricing. A calm would restore the narrative that cuts remain on the table, not erased, and the US dollar’s rebound — dramatic but thin on fuel — might start giving way.
The , in a similar context, has borne the full brunt of US dollar strength. came in softer than expected, cooling talk of a BoJ hike. With the market already fragile, USD/JPY flirted with 150 — that psychological “line in the sand” where traders squint at every chart tick for signs of intervention.
Yet this too looks like a temporary overextension. If the Fed’s easing path comes back into focus, the yen should be the main beneficiary of any unwind in US dollar strength. Above 150 may prove short-lived, a candle’s flicker rather than a bonfire.
Next week’s are the real lottery ticket. Estimates between 20k and 80k jobs highlight just how unpredictable the report has become, less a clean signal and more like roulette. Payrolls could easily reset the market’s entire Fed timeline, reinforcing or undoing this week’s US dollar surge. That’s why the squeeze feels more tactical than structural: it’s buying time, not rewriting the macro script.
Beneath all of this, the Lisa Cook saga — whispers about Fed independence and political intrusion — has barely made a dent in rates or FX. Traders aren’t seeing evidence that monetary policy credibility is in play, at least not through the lens of today’s market pricing. The narrative belongs to the data, not the courtroom.
In short, this US dollar rally feels like a shadow cast larger than its substance. The data flurry gave it life, but absent fresh surprises, it risks running out of road just as payrolls loom. Think of the US dollar as a runner who’s surged ahead on adrenaline but still has miles left to cover — a stride that looks powerful until fatigue sets in. If PCE cools as expected, the US dollar may trip over its own shadow before the weekend even begins.