The dollar is gaining strength after last week’s non-farm payroll data. It’s currently rising against major currencies. For example, EUR/USD is down 0.2% at 1.1750, and USD/JPY is testing levels above 145.00. This week, trade headlines and tariffs are expected to be in focus again. The dollar’s current strength might be short-lived due to the wider economic situation. Despite some advantages from a crowded dollar short position, the policy uncertainty under the Trump administration has kept pressure on the dollar.

Commodity Currencies Under Pressure

Commodity currencies are weakening, with USD/CAD up 0.4% to 1.3567 and AUD/USD down 0.7% towards 0.6500. Expect tariffs to grab attention in the coming days. In the bond market, 10-year Treasury yields are nearing 4.35%, testing both the 100 and 200-day moving averages. The current US fiscal situation is a negative factor for the dollar. However, a short squeeze on the dollar may occur, as it has faced challenges since April. This period shows the US dollar has found short-term support, mainly due to stronger-than-expected labor market data, which was a boost. This rise comes amid challenges from political instability and fiscal issues that have put downward pressure on the dollar. As risk sentiment shifts and trade news creates friction, commodity-linked currencies have fallen. We should see the current moves as temporary rather than definitive. When EUR/USD drops by 0.2% after a data release, it shows the market’s quick reaction rather than a strong belief in ongoing dollar strength. USD/JPY crossing 145 raises some concerns, as that level has historically caused discomfort in Tokyo. Speculators often enter just as institutional investors start to step back.

Bond Market Adjustments

The decline in commodity currencies makes sense in this context. A 0.7% drop in AUD/USD towards 0.6500 indicates low tolerance for risk when tariff headlines resurface. The same is true for CAD, weakening even with rising oil prices. This trend reflects not on domestic strength but on a general reluctance to hold foreign currencies against the dollar when Washington shifts its stance. The slide toward 4.35% in US 10-year bond yields isn’t just about strong payrolls. The real driver is a more complicated fiscal situation. With deficits rising and auction interest decreasing, investors are asking for more to hold US debt. As the 100- and 200-day moving averages are tested, rate expectations firm up—not because immediate hikes are likely, but because future pricing needs adjustment. Another important factor to monitor is that the dollar is one of the most heavily shorted positions in speculative portfolios. This isn’t unusual when fundamentals are misaligned. However, such positions can change quickly when crowded trades face new narratives. If there’s even a small improvement in US economic momentum and a reduction in trade tensions, short sellers may be forced to cover their positions, causing an upward squeeze. Early signs support this view. We need to watch the market closely but act clearly. This is not the time to rush into moves, especially at key technical levels that may not hold if liquidity decreases. As the week progresses, our approach should focus on market beliefs about future policy rather than the policies themselves—a crucial distinction. Create your live VT Markets account and start trading now.

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