The U.S. dollar held steady against other major currencies on Tuesday, supported by safe-haven flows. The U.S. economic calendar includes job openings and factory orders data for July. Later in the session, markets will watch the Federal Reserve’s Beige Book report and comments from policymakers.
By 12:09 GMT, the dollar index was unchanged at 98.3, after reaching a high of 98.6 and a low of 98.1.
U.S. Dollar: Bond Market Turmoil Threatens Recent Gains
The dollar’s latest rally looks more like a nervous spasm than a sustainable shift. The move was less about U.S. fundamentals and more about turmoil in global bond markets. Long-term bond prices from London to Tokyo sold off sharply, sending yields to multi-decade highs and pulling the dollar upward in the process.
Beneath this volatility, however, fundamentals remain tilted against the greenback: the U.S. labor market is showing signs of slowing, Fed Chair Jerome Powell has signaled a bias toward prioritizing employment over inflation, and the central bank is preparing to ease.
Friday’s U.S. jobs report is the key weight on the market’s balance. If it confirms stagnation, the reaction is predictable: traders will reinforce bets on larger near-term cuts, the yield curve will steepen further, and global bond desks will reposition. The report, therefore, has less to do with payrolls themselves and more with the shape of the yield curve and the credibility of the Fed’s pivot.
The open question is where the dollar will settle. Will it continue to ride the wave of global bond selling, drawing temporary support from safe-haven flows? Or will it realign with two-year U.S. Treasury yields, the traditional compass for FX traders? If cuts are aggressively priced in, two-year yields will bear the burden, potentially undermining the dollar’s base. For now, as long as global bond volatility remains elevated, the dollar can draw oxygen from safe-haven demand.
In short, the jobs report is pivotal. Weak data would set the stage for a series of easing steps, steepening yield curves further and eroding the dollar’s link with two-year yields. Only if this shift sparks broader risk aversion can the dollar hold on to its recent gains. Until then, the currency seems stuck between short-end U.S. yields and global bond market turmoil.
The author adds: “I see trimming dollar shorts as tactical, not the start of a broad squeeze higher — perhaps toward 1.15 — though I wouldn’t hesitate to buy dips. Yesterday’s dollar rally, sparked by heavy selling in UK Gilts and French OATs, lacked broad conviction.”
He notes that debt concerns outside the U.S. may have prompted some investors to reduce exposure, but argues this fuel is insufficient for a sustained dollar rally. “I’m watching dips, but patience is key; levels below 1.1625 are rare, and I’d rather wait than chase until the market forces my hand.”
The labor story extends beyond nonfarm payrolls, as Trump’s appointment of a new Bureau of Labor Statistics head raises questions about the credibility of official data. That places greater weight on secondary indicators such as JOLTS, which shows job vacancies declining but still well above pre-COVID averages. If layoffs continue to fall, policy repricing may be slower; if they start to rise, Fed easing could accelerate. In either case, Powell has made clear that risks are tilted toward employment, not inflation.
For the euro, valuation models point to fair value closer to 1.18, suggesting EUR/USD remains undervalued even with political risks in France. French OAT weakness may limit enthusiasm, but unless the crisis spreads more broadly, the impact on the single currency looks largely absorbed. Meanwhile, a stronger-than-expected 2.3% core CPI reading yesterday lifted two-year euro swaps and briefly eased 2025 rate-cut expectations. Still, ECB officials continue to signal they are “well positioned,” implying any policy shift will remain data-driven.
In Japan, global bond market turmoil extended further. Thirty-year JGB yields hit a record 3.28%, while 20-year yields reached levels not seen since 1999. These moves reflect politics as much as numbers: Prime Minister Fumio Ishiba faces pressure after a poor July election result, and investors fear a populist successor could boost fiscal spending and pressure the BoJ to slow rate hikes. Tomorrow’s 30-year bond auction will be a key test, with insurers showing little appetite for long maturities, preferring shorter tenors.
Altogether, the U.S. dollar looks suspended in mid-air rather than grounded on firm fundamentals. Safe-haven demand tied to foreign debt concerns cannot mask the opposite pull from the Fed’s pivot toward easing. The euro remains undervalued, the yen hostage to politics, and global bonds the fault line running beneath all assets.
The author concludes: “Dollar momentum looks fragile, ready to crack once the jobs data hits. Until then, I’ll keep most cash on the sidelines — ready to sell into deeper dollar rallies if they reach my levels, and chase dollar weakness only when the market itself opens the door.”
