The Dollar’s 24 hour roller coaster ride

The last 24 hours in FX were pure fairground theatre. The euro climbed the stairs into payroll revisions, traders leaning hard on the dovish Fed narrative. We did pop higher ever so briefly, only for the trapdoor to swing open and the greenback snap higher. The revisions told us what we already suspected — jobs growth stopped more than a year ago. On paper, that should’ve been a clean dollar dump. Instead, the dollar caught a modest bid, but enough to rattle the ride.

The twist came from geopolitics. Israel’s strike in Doha against senior Hamas leaders jolted haven demand, handing the dollar a reprieve it didn’t deserve on the data alone.

However, the larger story remains one of policy divergence. The market has the Fed pencilled in for three cuts before year-end( and a possible Jumbo), while the ECB is only dangling the possibility of a token “holiday cut.” That divergence is dollar-bearish at its core, even if the short-term ride looks like a jumble of whipsaws.

And now Tokyo has joined the script. Washington just eased tariffs on Japanese autos, while the BOJ edges toward hawkishness for the first time in months. It doesn’t take a conspiracy board to connect those dots: tariff relief on one side, BoJ currency support on the other. Whether by coincidence or quiet trade deal choreography, you don’t need a magnifying glass to read between the lines. Inflation is up anyway, so the BoJ has cover to lean into normalization just as Powell tilts the other way. The yen is no longer a one-way funding bet, and the dollar’s days above 146 against it may already be numbered.

So yes, the dollar coaster clatters on — down the stairs on dovish payroll chatter, up the elevator on geopolitics, looping sideways through French spreads. But gravity is apparent: the rails tilt lower, and the subsequent drop will be sharper if CPI doesn’t spark too brightly tonight. My compass is unchanged — EUR/USD above 1.20, USD/JPY below 145 inside 45 days. Until proven otherwise, I’ll keep riding this dollar short side.

Here is something to think about, however….

China’s economy is playing a strange carnival trick: the GDP numbers look like a bustling fairground, but when you peek inside the stalls, the shelves are bare. Prices are falling, revenues are flat, and the world’s second-largest economy feels more like a theme park where the music keeps playing but the rides are half-empty.

Deflation isn’t just an abstract number here — it’s a suffocating fog that settles over every street vendor, factory floor, and balance sheet. Factory prices have been sliding month after month since 2022, and consumer prices are stuck in reverse gear. It’s a treadmill economy: firms are running hard but staying in place, unable to grow their top lines even as headline GDP flashes “respectable.”

What’s happening underneath is a vicious supply-demand imbalance. Too many producers crowding the field, all cutting prices to keep the lights on, while households hunker down amid a housing slump and job insecurity. Beijing can try to referee the brawls — urging delivery platforms to stop subsidizing like drunken sailors — but unless policymakers are willing to let weak firms fail, the price wars will grind on. It’s the market equivalent of a boxing match where the ref never calls a knockout; fighters just keep swinging, bleeding, and exhausting the crowd.

The bigger tell is inventory. Piles are growing even as revenues stall, a sign of goods chasing buyers that never arrive. That’s margin pressure in its purest form: warehouses stuffed with unsold product while profits leak away.

And yet, equity markets keep their eyes on the shiny lights — tech dreams, AI breakthroughs, the next growth frontier. Traders may choose to look past the deflationary fog for now, but at the ground level, China Inc. is stuck in a hall of mirrors: headline growth looks strong, but inside those mirrors, the real picture is one of no demand and swollen warehouses.

This deflation will get exported to Europe and virtually every other dumping ground in China’s orbit.