Dollar confidence crisis goes prime time – Yen and Euro feast while Powell tiptoes

The dollar is slipping on more than just thin liquidity and soft data—it’s slipping on faith. Markets are starting to question one of the bedrock assumptions behind the dollar’s reserve currency status: an independent, inflation-fighting Fed. With President Trump ramping up public pressure on Powell to slash rates “now,” we’re not just flirting with jawboning—we’re staring down the barrel of a credibility unwind.

Let’s be clear: USD weakness isn’t just about economic cracks forming. This is a broader confidence bleed. Trump’s rhetoric signals that even the White House is front-running a slowdown. And that means the usual fallback narrative—“we’re strong, the Fed has our back”—is starting to fray. The Easter Monday dollar dump was no fluke. It was a clean sweep: rate expectations got repriced, and the dollar’s safe-haven mantle took a hit.

We’re now deep in the “Tariff Fallout: Real Economy Edition.” The lag effects are showing up in the data tape—subtle at first, but enough to break models and rattle boards. Soft indicators like ISMs, PMIs, and the Economic Surprise Index have already rolled. Now the question is how quickly those bleed into hard prints. Think margins narrowing, inventory misfires, and a general rethink of corporate forward guidance. This is where the data stops whispering and starts swinging.

Against this backdrop, USD/JPY is buckling, and it’s not hard to see why. The yen ticks all the right boxes: it’s a clean safe-haven with a solid domestic backdrop, and with Tokyo CPI expected to pop on Friday, the BoJ has cover to hold the line. Any perceived tightening bias—no matter how cautious—adds more tailwind. If Washington slaps a JPY appreciation clause into the pending trade deal, the path to 135 opens up fast.

Meanwhile, EUR/USD has sliced through 1.15 like it wasn’t even there. The next obvious level? 1.20. But let’s not get ahead of ourselves. This rally is less about euro strength and more about dollar disillusionment. The eurozone isn’t exactly a beacon of bullishness—another two ECB cuts are still in the cards. But in times like these, capital flows chase liquidity and relative stability. That puts the euro in the passenger seat of a USD-led move, not the driver.

Short-term, the EUR/USD ride may overshoot, but our base case caps the move around 1.15–1.16 unless Powell caves or gets the boot—both low-probability but high-impact scenarios. Markets are sniffing risk, but they’re not pricing Armageddon just yet. Watch S&P Global PMIs and Fed speak closely this week for signs of either capitulation or pushback.

As for volatility—it’s here to stay. FX is back in play, and with U.S. macro data light but politically charged, expect every soundbite from D.C. or Fed speakers to hit the tape like a live grenade.

Does the landslide keep picking up speed from here? Not guaranteed — but momentum’s a fickle beast, and right now, U.S. exceptionalism is skating on thinner and thinner ice. Let’s not forget what carried that trade in the first place: earnings. Relentless, quarter-after-quarter earnings growth that made every macro wobble feel like a dip to buy. But now? Earnings season’s in the hot seat, and if the corporate tape doesn’t deliver, the floor could crack again.

Sure, a few upside surprises could stall the bleeding — maybe even coax a tactical bid back into U.S. assets. But that's a big ask in a macro tape that's flashing uncertainty across the board. The forward guidance is where the bodies are buried. CEOs aren't dumb — they’re staring down input costs, inventory drag, and tariff noise, and they’re gonna guide with caution. That’s not how you build multiple expansion.

Now, could a trade deal headline save the day? Maybe. Japan’s the obvious candidate, and if something gets signed that isn’t just political theater, it might throw a bone and soothe risk sentiment. But let’s not kid ourselves — most of America’s major trade partners are already tariff-light. Trump’s asking for concessions from countries that don’t have much left to concede. It’s not a deal — it’s a PR squeeze.

Meanwhile, there’s this growing narrative that the U.S. is overpriced and the rest of the world is on sale. Great. But global rebalancing flows aren’t exactly bullish for risk. When investors rotate out of U.S. assets, it’s not a value play — it’s a flight to asymmetry. And that shift? It can turn a correction into a cascade. Because hedging U.S. exposure — whether through vol, USD shorts, or EM longs — creates feedback loops. The protections accelerate the pain. Welcome to the paradox of defensive positioning: the better you hedge, the faster you bleed.

So we’re in that gray zone now. Too early to call a rebound, too fragile to lean into risk. The dollar's on the defensive, equities are in the fog, and bonds are watching the Fed get politically waterboarded. What does that leave for traders? Patience, nimbleness, and a tight leash on conviction. We’re not in a trend market — we’re in a landmine market.

The view

Sometimes, the cleanest trade is no trade. Sit on your hands, let the circus roll by, and watch the tape for when signal reclaims its edge over noise. Because right now? The signal-to-noise ratio is shot. Powell drama, Trump soundbites, and headlines written for maximum headline risk — none of it’s giving you edge, just whiplash.

Everyone’s fixated on the fantasy scenario — can Trump actually fire Powell? Highly unlikely. Even if he tried, the backchannel diplomacy would light up like Times Square. Bessent wouldn’t be on Bloomberg TV, he’d be in full damage control mode, drafting contingency scripts for markets and Fed comms. The legal case is thin, the political cost high, and the optics? Brutal. Firing Powell doesn’t reset the Fed — it nukes the dollar’s institutional credibility.

The real danger isn’t in the act, it’s in the threat. The moment the market begins to think Fed independence is compromised (i.e.a 60-70% chance) — even just optically — you get a structural repricing: risk premia widen, bond yields decouple from policy path forecasts, and equity multiples compress. Because once the central bank becomes just another arm of fiscal policy, every CPI print becomes a coin toss. That’s not how you keep a reserve currency bid alive.

But here’s the twist: Powell still holds the cards — for now. He could cut. Not because Trump said so, but because the data’s already whispering “cut” anyway. The tariff drag is real, and the demand-side damage is on a slow fuse. Sure, inflation might tick up in the near term, but that’s just friction — the deeper risk is growth stalling into the teeth of tighter financial conditions and declining business confidence. Better to front-run that than chase it.

So why doesn’t Powell pull the trigger? Maybe he’s trying to preserve the Fed’s independence by refusing to dance to Trump’s beat. Maybe he’s waiting for harder data. But the longer he waits, the more he risks looking reactive instead of proactive. And in this market, optics are half the battle.

As for Trump — he’s not bluffing, but he’s playing for leverage. Keeping Powell around gives him the perfect scapegoat if things go sideways. Fire him, and every bad economic print becomes a MAGA referendum. Trump knows that. He’s keeping Powell close, not out of trust — but out of tactical necessity.

Bottom line? The dollar's fate is hanging on narrative control. If Powell holds the line and the data turns, we may stabilize. But if Trump keeps pushing and Powell caves too late, the market won’t reward him — it’ll punish him for blinking. FX traders should be thinking in probability bands, not base cases.