Market Brief: Dollar climbs against a rapidly-worsening risk backdrop

The dollar is advancing against all of its major peers, driven by a Federal Reserve that has turned far more hawkish, and a deterioration in risk appetite as technology stocks retreat.

Last week’s abrupt pivot from the Federal Reserve is still rippling across markets, and confounding the early-2026 consensus for a weaker dollar. After a series of stronger-than-expected data releases and evidence that inflation pressures are broadening, nine of 19 members of the Federal Open Market Committee submitted projections indicating they expect to raise rates by year-end, and markets are putting 90% odds on a move by September. Rate differentials have tilted decisively in the greenback's favour, and could move further if Thursday's personal income and spending report delivers confirmation of an acceleration in underlying price momentum.

At the same time, a selloff in major technology companies is bleeding into the broader risk and rates picture. After SpaceX lost $400bn in market value after announcing its first senior unsecured bond offering yesterday, and Amazon, Oracle and Meta each fell more than 2%, futures are pointing to steep declines in the Nasdaq and the S&P 500 at this morning’s open. As we have suggested in recent notes, the scale of capital expenditure in the technology sector is becoming a problem in its own right, with the so-called “hyperscalers” expected to spend more than $750bn in 2026, straining capital markets and raising questions about sustainability. US equity valuations remain extraordinarily elevated* and look vulnerable to a correction—one that, if it arrives, could tighten financial conditions far more rapidly than anything the Fed is contemplating.

Against this backdrop, most major currencies are following similar plot lines:

The Canadian dollar is holding near a 16-month low after yesterday's inflation data confirmed a lack of underlying price pressures in the economy, giving the Bank of Canada room to keep rates on hold. A soft domestic backdrop—slower growth, a weakening labour market, and lingering trade uncertainty—is intersecting with a drop in crude prices to keep the currency on the defensive, but the move is looking stretched from a technical standpoint. The loonie is trading below its 55-, 100-, and 200-day moving averages along with two of the Bollinger Bands we follow most closely, and is deeply oversold according to the relative strength indicator. Market sentiment is clearly against the currency, but moves of this magnitude have historically preceded a rebound.

The euro is down nearly 2.2% this month and trending lower after European Central Bank president Christine Lagarde suggested the impetus for further tightening was fading. In remarks prepared for the European Parliament, Lagarde said the energy-price shock hitting the euro zone was "too large to look through", but added that "we see no evidence yet of de-anchoring of inflation expectations or second-round effects that would warrant a more forceful policy response at this stage". The economy and inflation were currently tracking between the Bank's baseline and milder scenarios, she said, prompting traders to pare rate-rise expectations, with 29 basis points of tightening now priced in by year-end, down from 36 previously. The common currency is approaching the 1.14 threshold that has held for much of the past year, with a sustained break below that level likely opening the door to further declines.

Sterling has fallen almost 2% this year, dulling its sensitivity to domestic political headlines. Yesterday's resignation of Prime Minister Starmer barely moved the currency—a reaction that may reflect relief that Labour looks set to avoid a drawn-out leadership contest rather than any verdict on Andy Burnham, the Greater Manchester mayor now installed as frontrunner—but there are also early signs of continuity at the Treasury. Former health secretary Wes Streeting is emerging as a strong candidate to replace Chancellor Rachel Reeves, and is seen as a centrist unlikely to dismantle his predecessor's fiscal framework or embark on any dramatic loosening of the spending rules. For now, sterling is in limbo, with developments across the Atlantic more likely to dictate its direction than anything happening at Westminster.

The yen is pinned near a 40-year low, with intervention speculation building after Japanese Finance Minister Satsuki Katayama met US Treasury Secretary Scott Bessent to discuss market conditions. The meeting was part of a regularly scheduled series and does not necessarily signal a joint effort. But Bessent, after a stint with George Soros, is a known advocate of currency intervention—and Japanese authorities may favour more decisive action this time, given that the yen has resumed its decline after Tokyo spent a record $73.6bn in a single month trying to prop it up earlier this year. That record sum bought time, not a change in the trend, and officials will want the next attempt to be more conclusive. We expect the next move to involve a heavy element of surprise as the Ministry of Finance seeks to wrong-foot speculative short positions. The yen's current weakness is driven by rate differentials that intervention alone cannot close—but a well-timed, coordinated strike could inflict enough pain on leveraged sellers to deter the next wave.

It is difficult to see these dynamics reversing on a change in economic conditions outside the United States. Rather than a turn in any individual foreign economy, a moderation in the dollar's outperformance is more likely to come from two directions: a shift in rhetoric from Fed officials suggesting the hawkish repricing has gone too far, and a peak in US economic data as early-year surprises give way to a more nuanced growth outlook over the summer months. Until that happens, positioning against the greenback will remain a dangerous trade.

*The "Buffett indicator"—the ratio of total US market capitalisation relative to gross domestic product—was introduced by Warren Buffett in a 2001 essay co-authored with Carol Loomis. He called it "the best single measure of where valuations stand at any given moment," saying "If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you ... If the ratio approaches 200%—as it did in 1999 and a part of 2000—you are playing with fire". The indicator is now sitting close to 232%.

Market Overview

Data as of 7:15 AM EDT

Notes: DXY: Dollar index, DMA: Daily Moving Average, Pivot points are calculated on a one-month basis, 3-month and 10-year spreads are against USD, Implied V.: implied at-the-money option volatility

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