U.S. Dollar’s Haven Appeal Returns Amid Global Political Chaos
After spending much of this year battling domestic political and rate-cut headwinds, the greenback is now finding renewed support -- not because the US looks especially rosy, but because its peers look worse, as Tatiana Darie mentioned. Europe is once again mired in political dysfunction, and Japan’s policy outlook has shifted in a way that blunts near-term optimism for the yen.
French government turmoil has returned after Prime Minister Sébastien Lecornu’s resignation, a move that has left fiscal reform hopes in tatters and spreads on the rise. The country’s 2026 budget is increasingly unlikely to pass before year-end absent extreme measures, keeping the economy stuck in a cycle of policy paralysis and heightened deficit risk.
President Emmanuel Macron’s options are quickly narrowing -- he could appoint a new PM empowered to invoke Article 49.3 and force the budget through parliament, call early national elections, or even resign. Developments over the weekend have made the first two scenarios far more probable.
For the euro, the longer-run impact may be contained with the ECB primed to step in and contain spreads via TPI, but Europe’s growth and governance story remains fragile. Speaking at the European Parliament on Monday, ECB President Christine Lagarde did her best to maintain a “soft floor” under the euro, reiterating that the disinflation process is over and that growth risks are now more balanced.
Meanwhile, Japan’s political shift could prove just as consequential. The impending prime ministerial appointment of Sanae Takaichi, long a critic of BOJ normalization, has effectively erased bets on a Bank of Japan rate hike this month. Her reflationist stance signals continued tolerance for ultra-loose policy -- and the yen has responded accordingly, with USD/JPY comfortably back above 150.
I wrote in September that the dollar was poised to benefit from US economic resilience -- that remains true. IMF COFER data showed net purchases of US assets in the second quarter, underscoring that global demand for US exposure remains firm. But now another pillar is emerging: as France stumbles and Japan is seemingly doubling down on easy money, the dollar’s relative stability looks like a case for strength. As my colleague Mark Cudmore highlighted, the stars are aligning for a dollar short squeeze -- and the setup is looking increasingly convincing.
Source: Bloomberg
