The US economy continues to grow, the labor market remains resilient, and the dollar is weakening—as if it were ignoring the positive developments. This paradox has concerned the Forex market more over the past month than any macroeconomic data.

Following the Fed's July meeting, the greenback lost ground. Kevin Warsh's press conference convinced markets that the central bank was not prepared to respond aggressively to a new surge in inflation. Long-term Treasury yields rose, but this did not help the dollar—EUR/USD remained stable around 1.15.

Nevertheless, short-term risks for the U.S. dollar appear balanced. The weak July employment report prompted the futures market to reduce its expectations for Fed monetary tightening to one rate hike instead of two. If the data improves, the greenback could receive some temporary support.

However, positioning suggests otherwise. The market is already positioned short on EUR/USD, betting on further dollar strength. It would take only a few negative surprises in U.S. economic data for investors to rush to close these positions, potentially triggering another wave of dollar weakness. At the same time, implied volatility for the pair remains surprisingly low—as if markets were overlooking the scale of the two-sided risks.

U.S. Dollar Performance and the Treasury Yield Differential

In fact, the root of the problem lies deeper than current economic conditions. Over the past seven years, the dollar exchange rate has been closely linked to the slope of the yield curve—the spread between 30-year and 2-year Treasury yields. The curve is expected to flatten further, along with the risk premium priced into long-term yields, which currently appears unjustifiably low.

In reality, the dollar is weakening not because of a weak economy, but despite a strong one. Sustained GDP growth no longer guarantees support for the currency—fiscal imbalances and elevated asset valuations are playing an increasingly important role. The value of the U.S. stock market has reached approximately 238% of GDP, while foreign portfolios are already heavily concentrated in U.S. assets. There is increasingly less room for additional capital inflows.

Goldman Sachs expects the Fed to keep its policy rate at 3.5–3.75% through the end of 2026, while the ECB is expected to add another 25 basis points in September, bringing its deposit rate to 2.5%. According to the bank, the risks to European monetary policy are tilted more toward further tightening than toward a pause.

Thus, the interest-rate differential is gradually ceasing to be the main argument in favor of the dollar. Fiscal fundamentals and imbalanced positioning matter much more for the dollar's outlook than another employment report.

I do not think the dollar will manage to recover from these problems by the end of the year.

Technically, on the daily chart, EUR/USD bulls have managed to consolidate above the 2–4 line of the Wolfe Wave pattern and break above the fair value level. Long positions opened at 1.154 can be increased if resistance at 1.157 is broken.