Amid widespread pessimism, the U.S. dollar’s “unexpected rebound” is underway.

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Against the backdrop of a widespread market bet on a weakening dollar, multiple signals from the yen, euro, and options markets are jointly pointing in an unexpected direction: a dollar rebound may be quietly playing out.

The latest movement has been led by the yen. On Monday, the yen sharply weakened at the opening, but unlike the usual pattern where it quickly regains lost ground, its decline has persisted this week. The USD/JPY exchange rate not only failed to fill the opening gap but is now setting the longest winning streak so far this year.

Meanwhile, the euro has also shown weakness. As French political risks escalate, the bullish momentum for the euro has cracked, with options market data showing a significant increase in bearish positions. According to media reports, hedge funds are actively cutting euro long positions, with some accounts even turning to shorting.

The yen and euro together make up about half the weight in the dollar index, and now that both are weakening in sync, coupled with Fed officials rebutting expectations for aggressive rate cuts, the dollar is getting multiple layers of support. Market price movements have started to contradict the mainstream bearish narrative, which may suggest a new phase of dollar strength has begun.

The Yen Breaks Convention, Short Covering Fails

The yen's movement is breaking historical convention.

Under normal circumstances, when a sharp drop occurs at Monday's opening, the yen usually regains lost ground within the following week or even the same day. In nine out of the last ten similar cases, this rule was followed, but this time is an exception.

Since the market widely interprets Sanae Takaichi's victory in the ruling party leadership election as a signal that the Bank of Japan will remain limited and fiscal expansion will be back on the agenda, yen carry trades may become active again.

In addition, data show Japan's wage growth has dropped to a three-month low, also putting pressure on market sentiment.

Amid simultaneous shifts in policy and market perception, investors are accelerating position adjustments. Volatility skew indicators in the options market show that traders are increasingly taking on exposure to USD/JPY upside risk.

French Political Risk Ferments, Euro Rally Falters

With French Prime Minister Le Corny resigning suddenly less than a month into office, the country's political risks have intensified and the euro's upside momentum is showing obvious cracks.

According to data from the US Depository Trust & Clearing Corporation (DTCC) on Monday, bearish exposure to the euro has reached its highest level in a month. Risk reversal indicators for periods under two months have turned negative, and the one-year volatility skew has dropped below 50 basis points.

At the same time, bullish positions on the euro have decreased for the fourth consecutive week, indicating fading investor confidence. The options desk has also observed that bullish structures are being continuously closed out.

All this is happening as trading volumes return to normal, suggesting that there is real market participation behind current position adjustments, possibly indicating a broader narrative shift.

Fed Narrative Shifts, Further Fueling Dollar Rebound

In addition to external support, the dollar also appears to be gaining momentum from domestic US factors.

First, several Federal Reserve officials have publicly pushed back against market pricing for aggressive rate cuts, supporting the dollar.

Second, the US government shutdown and delayed release of economic data have unexpectedly helped the dollar in this episode, which is contrary to the usual trend of dollar weakness during previous government shutdowns.

Adding to this are signs of initial progress in US political negotiations. These combined factors make the current market structure look like the start of a broader dollar rebound.

Risk Warning and DisclaimerThe market involves risk, and investment needs to be cautious. This article does not constitute personal investment advice and has not considered the special investment objectives, financial situation, or needs of any individual user. Users should consider whether any opinions, viewpoints, or conclusions in this article are appropriate for their particular circumstances. Investing accordingly is at your own risk. ```