Macro Dispatch: USD Peak? Or Second Wind?
August 2025: For Traders Who Think in Global Terms
👋 Welcome back at it, macro minds
Another week, another question: Has the U.S. dollar topped out, or is this just a pause before another surge?
With real yields rising, geopolitical jitters heating up, and central banks diverging, the greenback is back in focus.
Let’s cut through the noise and break down what’s actually driving the DXY—and where the trade setups are lining up next.
The Big Idea
The U.S. dollar has been on a quiet but resilient rally over the past six weeks, reclaiming ground against both developed and emerging market currencies. But is this the last gasp of USD strength, or the start of another structural leg higher?
This issue breaks down what’s fuelling the dollar’s latest move, and whether traders should fade or follow the strength.
DXY Snapshot
DXY Index (USD basket): 107.30 (+2.9% over the past month)
Highest level since March 2024
Key contributors: Weak euro, yen depreciation, EM outflows
What’s Driving the Dollar?
1. Real Yield Differentials Still Favor USD
U.S. 10Y real yields are hovering near 2.15%, while German Bunds are sub-1%, and Japanese real yields are negative.
Markets have pushed back Fed rate cut expectations to March 2026, pricing in just 25–50bps by then.
Compared to ECB and BoJ, the Fed remains the most hawkish especially in inflation-adjusted terms.
Takeaway: As long as U.S. real yields outpace G10 peers, USD demand—particularly from yield-seeking flows remains structurally supported.
2. Geopolitical Risk = Flight to Safety
Renewed tensions in the Taiwan Strait and a volatile Middle East have kept safe-haven flows alive.
With elections in the U.S., UK, and India this year, political uncertainty is feeding volatility premiums and demand for USD liquidity.
China’s ongoing economic malaise and capital outflow pressures also indirectly support the dollar.
Positioning Implication: A risk-off spike could push USD even higher especially vs EM and pro-cyclical currencies.
3. Positioning: Room to Run?
CFTC data shows non-commercial USD longs have rebuilt modestly, but far from crowded.
EUR/USD net longs are still relatively heavy offering fuel for a deeper squeeze lower if the euro weakens.
Options skew in USD/JPY is increasingly one-sided, pointing to speculative hedging, but not yet panic.
Note: Positioning isn’t stretched enough to signal a reversal, meaning there's room for another leg up.
Counterpoint: Case for a Peak
US fiscal concerns are back in the narrative bond vigilantes haven’t disappeared.
A slowing labor market could reignite Fed dovishness sooner than markets expect.
If global growth stabilises and China stimulates, the relative USD growth premium could fade.
Tactical Setups We’re Watching
EUR/USD – Watch 1.0600. If it breaks, there's a vacuum to 1.0450. Bearish momentum but short-term oversold.
USD/JPY – Pushing 158. Intervention risk looms. Consider options to express long USD/JPY views with defined risk.
AUD/USD – China proxy play. Fade strength unless Beijing delivers real stimulus.
Quick Tools & Charts (Which I use)
FRED Real Yields
CFTC FX Positioning
DXY Components Tracker
TL;DR
Is the USD overbought? Not yet.
Are real rates and risk-off flows still supportive? Yes.
Would we chase it here? Selectively. Choose pairs with weak macro backdrops and crowded positioning (e.g., EUR/USD, GBP/USD).
Thought to Trade On
“When you don’t believe the story but the tape won’t go your way trade what you see, not what you think.”
– Elite Economist