The dollar is gaining traction following the previous week’s non-farm payrolls data. It is currently rising against major currencies, with EUR/USD slipping by 0.2% to 1.1750 and USD/JPY testing levels above 145.00.
Trade headlines and tariffs are expected to once again take the spotlight this week. The greenback’s current strength might be temporary, given the broader economic context. Despite potential advantages from a crowded dollar short position, policy volatility under the Trump administration has left the dollar under continuous pressure.
Commodity Currencies Under Pressure
Commodity currencies are down, with USD/CAD rising 0.4% to 1.3567 and AUD/USD dropping 0.7% towards 0.6500. The market’s attention should also turn to tariffs in the coming days.
The bond market shows 10-year Treasury yields nearing 4.35%, touching the 100 and 200-day moving averages. The US fiscal situation currently acts as a negative factor for the dollar. However, a short squeeze on the dollar might be due, as it has faced ongoing challenges since April.
The existing passage outlines a period in which the US dollar has found short-term support, largely due to stronger-than-expected labour market data. That payroll figure provided the initial spark. This rise came despite headwinds elsewhere, particularly from political instability and fiscal concerns, which have led to broader downside pressure in recent months. As risk sentiment teeters and trade-related developments begin to add friction, the former upward glide in commodity-linked currencies has faltered.
In terms of practical response, we should approach the current moves with a sense of temporary acceptance rather than conviction. When a currency pair like EUR/USD nudges lower – in this case by 0.2% – following a data point, it reflects the market’s immediate reaction, not necessarily its belief in continued dollar strength. USD/JPY appearing above 145 also sets off a few alarms, as that level has previously involved some level of official discomfort in Tokyo, whether explicitly stated or not. There’s been a pattern to these moves in the past: speculators step in just as institutional hands start to pull back.
Bond Market Adjustments
Commodity currencies losing momentum is understandable in this sort of backdrop. A 0.7% drop in AUD/USD toward the 0.6500 mark shows that there’s little tolerance for risk when headlines around tariffs begin to resurface. When we see CAD weakening at roughly the same rate, even in the face of higher oil prices, it tells us this is not about domestic strength but about a broader unwillingness to stay long on foreign currencies against the dollar when Washington starts shifting its tone.
Bond yields drifting toward 4.35% on the US 10-year isn’t just a reflection of strong payrolls – the actual driver is a more complex fiscal picture. With deficits swelling and auction coverage thinning out at recent Treasury sales, investors are starting to demand more to hold US debt. As the 100- and 200-day moving averages are being tested on those yields, rate expectations begin to firm up. Not because rate hikes are likely this month, but because pricing further out has to adjust.
But there’s another factor worth watching. The dollar remains one of the most heavily shorted positions within speculative portfolios. That’s not unusual when underlying fundamentals don’t line up neatly. However, such positions can unwind quickly when crowded trades bump against shifting narratives. Should we see even a small pick-up in US economic momentum, paired with any reduction in trade hostilities, short sellers may be forced out. That could trigger some pain on the way up. Indeed, what we’re likely looking at is a squeeze in stages. Some early signals are already poking through, and positioning data seems to support that view.
We need to observe with patience but act with clarity. This isn’t the time to chase moves, especially at key technical levels that may not hold unless liquidity thins. As we move further into this week, our approach relies on what markets believe about forward policy, not the policies themselves. A subtle but important distinction.
