Nomura said the latest dollar upswing has been underpinned by firm US macro releases, a repricing of Federal Reserve policy expectations and an extended period of US equity outperformance, despite a recent pullback. The bank argued, however, that the “US exceptionalism” trade appears increasingly exposed as the hurdle for further upside data surprises rises and market positioning becomes more stretched.
Using the full history of the US Economic Surprise Index, Nomura identified 41 instances where the gauge crossed above 60, a level it has hovered around over the past week. It then assessed subsequent US dollar performance against all G10 currencies, and on an equal-weighted basis, over 1 week and 2 weeks, as well as 1 month and 3 months. When the threshold was raised to 70, returns were more consistently negative across each window, implying that strong US surprises have tended to be followed by dollar weakness rather than strength in the months ahead.
Dollar Bulls Face Crowded Positioning and Stretched Sentiment
We see the strong case for the U.S. dollar, fueled by solid economic reports and expectations for the Fed to hold rates. However, this bullish sentiment is becoming crowded, with the latest CFTC data showing speculative long positions on the dollar reaching an 18-month high. This stretched positioning makes the currency vulnerable to a shift in narrative.
Economic Surprise Index Signals a Potential Turning Point
The key indicator we are watching is the U.S. Economic Surprise Index, which is currently sitting at a lofty 68.5. While this reflects a run of better-than-expected data, the bar for future positive surprises is now incredibly high. History shows that when this index reaches such levels, it often marks a point of peak optimism just before a reversal.
Historically, when the surprise index has crossed above the 70 level, the dollar has consistently weakened against G10 currencies over the following one to three months. This pattern suggests it’s time to consider downside protection or speculative bearish positions on the dollar. We believe buying out-of-the-money put options on the Dollar Index (DXY) for August or September expiration offers a cost-effective way to position for this potential turn.
A potential catalyst could be a softening in the labor market, as hinted by the unemployment rate ticking up to 4.0% in May 2026 despite a strong payroll number. We are therefore looking at structures like call spreads on the EUR/USD, as the Eurozone shows signs of a cyclical recovery. This provides a way to gain upside exposure to a weakening dollar with defined risk.
