The US Dollar isn't broken yet

Yesterday's payrolls report was a critical test, which the Dollar passed with flying colors

The jury is out on the Dollar. It’s fallen sharply, unleashing a debate over its reserve currency status. In all my years on the trading floor at Goldman, we’d learn the most about currencies by watching their behavior around key data releases like yesterday’s payrolls. Data releases are like a natural experiment. They’re invariably stronger or weaker than expected, so there’s a steady stream of surprises. How markets price such surprises - in the minutes that follow - tells you a lot about how they see a currency.

Which brings us to the Dollar. There was a time - you have to go all the way back to 2012 - when strong US data would weaken the Dollar. That’s because markets at the time believed the Fed would always be more dovish than other central banks. Positive data surprises were seen as weighing on real rates in the US vis-à-vis everyone else, causing the Dollar to fall when payrolls had an upside surprise. This correlation only flipped in 2013 when the “tapter tantrum” convinced markets the Fed had what it takes to be hawkish. The fact that the Bank of Japan and ECB around this time were moving towards QE also helped.

The chart on the horizontal axis shows the monthly payrolls surprise from Jan. 2006 through Jun. 2025. I measure the surprise as the difference between the actual payrolls release and Bloomberg consensus in the run-up to the release (Bloomberg surveys many professional forecasters ahead of every release). When this surprise is positive, data are stronger than expected, while they’re weaker when the surprise is negative. The vertical axis gives the change in the Dollar in the 24 hours around each release. For the Dollar, I’m using the widely-used DXY index, which is the trade-weighted Dollar against the rest of the G10 (other advanced economies).

Yesterday’s surprise was +0.2 standard deviations, i.e. barely any surprise at all. The Dollar rose 0.4 percent, far more than is normal for such a small surprise. Two things stand out. First, we’re definitely not back to the kind of negative correlation we had in 2012 and before, so the Dollar is healthy and its behavior in line with the past decade, when it strengthened considerably. Second, yesterday’s rise in the Dollar is far greater than you’d expect for such a modest upside surprise. This is partly because market expectations were more negative than Bloomberg consensus. Markets were looking for a recession signal and didn’t get it.

None of the policy chaos of recent months is good. Nor is unrelentingly irresponsible fiscal policy helpful for the long-term standing of the Dollar. But the preeminent status of the Dollar, including its reserve currency status, were built over many decades, which will take a long time to unravel. We’re not remotely there yet. The Dollar isn’t broken yet.