Amidst a chorus of bearish voices, the dollar's "unexpected rebound" is underway

Against the backdrop of the market generally betting on a weaker dollar, multiple signals from the yen, euro, and options markets are collectively pointing in an unexpected direction: a dollar rebound may be quietly underway.

The latest dynamics are led by the yen. On Monday, the yen significantly weakened at the opening, but unlike the usual pattern where it quickly recovers, its decline has continued this week. The USD/JPY exchange rate not only failed to fill the gap but is also setting the longest consecutive rise record this year.

Meanwhile, the euro is also showing signs of fatigue. Due to deepening political risks in France, the bullish momentum of the euro has cracked, with options market data showing a significant increase in bearish positions. According to media reports, hedge funds are actively reducing their euro long positions, with some accounts even starting to short.

The yen and euro together account for about half of the dollar index, and the simultaneous weakening of the yen and euro, combined with comments from Federal Reserve officials refuting aggressive rate cut expectations, is providing multiple supports for the dollar. The market price movements have begun to contradict mainstream bearish rhetoric, which may suggest that a new phase of dollar strength has begun.

Yen Breaks the Norm, Short Covering Falls Flat

The yen's movement is breaking historical norms.

Typically, when there is a significant drop at the opening on Monday, the yen can recover within the following week or even within a day. In the past ten similar situations, nine followed this pattern, but this time is an exception.

As the market generally interprets the victory of high-profile candidate in the ruling party leadership election as a signal that the Bank of Japan will continue to be constrained and fiscal expansion will return to the agenda, yen carry trades may become active again.

Additionally, data shows that Japan's wage growth has fallen to its lowest level in three months, which also puts pressure on market sentiment.

Under the dual transformation of policy and market perception, investors are accelerating position adjustments. The volatility skew indicator in the options market shows that traders are increasingly adding exposure to the upside risk of USD/JPY.

French Political Risks Ferment, Euro's Upward Momentum Shows Cracks

With French Prime Minister Le Cornu suddenly resigning less than a month after taking office, the political risks in the country have further fermented, and the euro's upward momentum is showing clear cracks.

Data from the Depository Trust & Clearing Corporation (DTCC) on Monday showed that the market's bearish exposure to the euro has reached its highest level in a month. The risk reversal indicator has turned negative within a two-month period, and the one-year volatility skew has also dropped below 50 basis points.

Meanwhile, the euro's bullish positions have decreased for the fourth consecutive week, indicating that investor confidence is waning, and options trading desks have observed that bullish structures are being continuously liquidated.

All of this is happening against the backdrop of trading volumes returning to normal, indicating that the current position adjustments are backed by substantial market participation, which may signal a broader narrative shift.

Federal Reserve Narrative Shifts, Adding Fuel to Dollar Rebound

In addition to external support, the dollar seems to be gaining momentum from domestic factors in the United States First, multiple Federal Reserve officials have publicly rebutted the market's pricing for aggressive rate cuts, providing support for the dollar.

Second, the U.S. government shutdown and the delay in the release of economic data have unexpectedly helped the dollar in this round of market movements, contrary to the usual trend of the dollar weakening during government shutdowns.

Additionally, with signs of preliminary progress in U.S. political negotiations, a combination of factors has made the current market landscape appear to be the beginning of a broader dollar rebound