The Dollar drifts away as politics, Powell, and Payrolls pull the strings

The dollar’s been limping lower, the DXY sliding back below the 98-handle like a ship caught in cross-currents — the charts say “support,” but the macro and politics say “mutiny.” Yesterday’s July CPI print was the shove that tipped it over: headline +0.2% m/m, core +0.3% m/m, right on consensus, killing the tariff-panic narrative for now. No upside shock meant traders could go back to the real driver of the September FOMC — the slowdown in jobs — and keep leaning into rate-cut bets. Fed funds futures have September at a done deal for -25bp, with -60bp by year-end penciled in. For dollar bulls, that’s a barren toolkit.

Yet the inflation picture isn’t squeaky-clean. Outside food and energy, prices are inching higher again — the long disinflation drift post-Covid is over. Core inflation is 3.1% y/y, and Powell’s pet “supercore” (services ex-shelter) is climbing again, up to 3.2% from 2.7% in April. Sticky-price inflation, the kind that barely bends, has turned north, and median CPI never got close to target before rising again. Cleveland Fed trimmed mean? Same story. This isn’t the backdrop where central banks normally ease, as Jim Bianco points out, in the past four decades the Fed has only cut with core >3% and three-month momentum >0.3% once outside of a war or recession.

Still, political gravity is overriding monetary orthodoxy. Trump blasted Powell on Truth Social (“Jerome ‘Too Late’ Powell must NOW lower the rate”) and even dangled a lawsuit over “mismanaging Fed building construction.” Treasury Secretary Bessent upped the ante, saying a 50bp “jumbo” cut should be on the table and hinting Stephen Miran’s September arrival would “change the composition” of the Fed. Miran, for his part, is dismissing tariff fears as “tariff derangement syndrome,” calling their inflation impact a one-off price shift at best. The CPI internals back him up on goods — core goods ex-autos slowed to +0.2% from +0.5%, though the breadth of increases hit a 30-month high at 65% of items. Some tariffed products like home furnishings are passing costs through, others like new autos are still eating the hit thanks to fat margins and consumer pushback.

Services, though, are still hot. The July spike in airfares (+4% m/m) and another jump in medical services pushed core services inflation up +0.4%. Shelter kept easing, which should keep July core PCE at about +0.3% m/m — “well behaved” by Miran’s lights, but still north of target.

On top of this comes a brewing credibility issue in the labor data. Trump’s nominee for BLS chief, E.J. Antoni, floated the idea of scrapping monthly payrolls in favor of quarterly reporting. Official spin: modernize data collection and boost response rates (now below 70%). Market read: political interference risk, higher USD risk premium, which is essentially like a tax on the dollar.

Regardless of your CPI interpretation, yesterday’s CPI was like a neon “SELL USD” sign blinking over the market — and plenty of desks stamped their ticket. EUR/USD spiked on the release, clearing initial resistance like a hot knife through butter. But the real story could be happening today in London. The European morning brought another big wave of dollar selling with real money, macro funds, and overlay hedgers all leaning in ahead of Friday’s Trump–Putin summit and possibly weak US retail sales. Both the EUR and JPY are in demand at the London open..

And make no mistake, this isn’t your clean, textbook macro dollar short. It’s a cocktail, and the ingredients don’t usually go together. You’ve got sticky inflation metrics that would normally keep cuts off the menu. A labor market wobbling just enough to justify easing, but not enough to scream “recession.” Political pressure leaning on the central bank harder than it has in decades. A Fed board set to tilt more dovish once the new appointments land. An equity market — juiced by AI optimism and fat corporate margins — priced for perfection and desperate for lower yields to keep the valuation math intact. And, hanging over it all, FX vols scraping year-lows, making dollar-funded carry trades too cheap to pass up.

The dollar’s role in this movie is far from heroic. It’s not steering the ship — it’s lashed to the mast, taking whatever wind and current the Fed and White House decide to send its way. Until payrolls shock the market or geopolitics blows a hole in the risk-on mood, the USD is just ballast in a carry trade vessel sailing full tilt into calmer seas. The best it can hope for now is that the crew doesn’t decide to start tossing it overboard before Friday’s summit gives us our next weather report.