The dollar spent the week trapped between competing identities — tariff enforcer and safe haven — and the market increasingly doubts it can be both. DXY tested 98.00 three times and was rejected every time, closing Thursday at 97.77, essentially flat week-on-week. Meanwhile, gold pushed back above 5,185 and speculative USD shorts reached their most extreme level in five years. The pattern is clear: the dollar rallies on headlines but can't hold the gains.
This was the week the tariff regime's legal foundations were stress-tested — and the dollar's reaction said everything about where the macro regime is heading.
The week opened with FedEx filing suit in the Court of International Trade, seeking a full refund of IEEPA-collected duties and becoming the first major corporation to challenge the tariff apparatus head-on. That single filing put a spotlight on the roughly $175 billion in tariff revenue collected under IEEPA authority — all of which is now exposed to legal challenge following the Supreme Court's ruling against reciprocal tariffs.
The administration's response was to pivot, not retreat. In his State of the Union address Tuesday night — a record 108 minutes, the longest in history — Trump called the SCOTUS ruling "unfortunate" and "disappointing" but declared that Congressional action would "not be necessary," citing "fully approved and tested alternative legal statutes." The White House signaled Section 122 of the Trade Act of 1974 as the replacement vehicle, which allows unilateral tariff action but carries a 150-day time limit and requires Congressional renewal.
By Wednesday, Trade Representative Greer confirmed rates could rise to 15% or higher from the current 10% baseline. The market's reaction was instructive: DXY touched 97.99 on Tuesday and 98.00 on Wednesday before fading back to 97.77 by Thursday's close. The dollar no longer rallies on tariff escalation. What used to be a reflexive bid — tariffs equal stronger dollar — has been replaced by uncertainty about the legal durability of any trade regime this administration implements.
Gold was the week's clearest signal. XAU/USD opened Monday near 5,100 and surged to 5,238 by Monday's high — a $140 move in a single session — before pulling back Tuesday to 5,148 and then grinding higher through Thursday to close at 5,186. The bid was broad-based: central bank demand, ETF inflows, and speculative positioning all pointed the same direction.
The week's most important research note came from JP Morgan on Tuesday. The bank raised its long-term gold forecast by 15% to $4,500/oz and maintained its year-end 2026 target at $6,300 — more than 20% above current spot. The rationale is worth unpacking: JPM cited increased central bank buying, public announcements of US Treasury divestment by several nations, and countries actively shifting revenue bases away from the dollar and into renminbi. They explicitly raised their probability weighting for a "reserve currency paradigm shift."
Gold's all-time high of $5,595 from January 29 is roughly 8% above current levels. The 11% correction that followed — one of the largest single-day drops in gold's history, comparable to January 1980 and February 1983 — has been almost entirely retraced. That tells you the buyer base is deep and the dips are being bought aggressively.
We continue to hold our Q2 outlook view: gold is structurally bid above $5,000. Dips below $5,100 are accumulation opportunities. The combination of central bank demand (JPM forecasts 755 tonnes in 2026), ETF inflows (250 tonnes expected), and bar-and-coin demand above 1,200 tonnes provides a demand floor that doesn't require a crisis to sustain.
The rates picture is doing something unusual. The US 10-year held near 4.03% all week — its lowest sustained level in three months — while jobless claims on Thursday came in at 212,000, below the 216,000 consensus. That combination — falling yields alongside a tight labor market — reflects a market that's pricing in economic deceleration without labor market deterioration. It's the soft landing narrative, still alive but growing fragile.
Markets have scaled back Fed rate cut expectations significantly. The probability of a June cut has fallen to 50%, the lowest reading of the year, and expectations for a third cut by year-end have essentially evaporated. Fed officials Collins and Barkin both signaled that holding steady is the appropriate posture.
USD/JPY was the week's most volatile cross. The pair plunged to 153.99 on Monday — its lowest level since early February — before rebounding sharply to close at 156.36 by Wednesday, a 237-pip reversal in three sessions. Thursday brought a modest pullback to 156.11. The net result was a gain of 0.7% for the week, masking enormous intraday swings.
Two opposing forces drove the volatility. On the bearish side (yen strength): the revelation that US Treasury Secretary Bessent directly led the yen rate checks conducted in late January — an extraordinary level of US involvement in what is normally a unilateral BOJ-MOF operation — continues to overhang the pair. On the bullish side (yen weakness): Japanese PM Takaichi publicly pressured BOJ Governor Ueda against further rate hikes, creating political uncertainty around the BOJ's normalization path.
The net effect is a pair caught between Washington's desire for a weaker dollar against the yen specifically, and Tokyo's political resistance to BOJ tightening. That tension produced a 284-pip weekly range — the widest in three weeks — with no clear resolution. The yen carries a 13.6% DXY weight, so its direction matters for the broader dollar picture.
Thursday's third round of US-Iran nuclear talks in Geneva concluded with what Oman's foreign minister called "significant progress" — though without a finalized deal. Both sides agreed to resume technical discussions in Vienna next week. Iran's FM Araghchi described the session as the "longest, most serious" round to date, with discussions entering the substantive details of enrichment caps and sanctions relief.
The backdrop was anything but diplomatic. Satellite imagery from Chinese company Mizarvision revealed 11 F-22 stealth fighters newly deployed to Ovda Air Base in southern Israel. Two carrier strike groups remain positioned in the region. The US imposed fresh sanctions on 30+ Iranian oil and missile entities on the eve of the talks. Trump's 10-to-15-day deadline for a deal, set during his SOTU, expires in early March.
For FX, the Geneva dynamic is binary but asymmetric. A deal collapses the oil risk premium and is net USD-negative — it removes a safe-haven bid and redirects capital toward EM and commodity currencies. A breakdown reignites strike fears, sends gold through 5,300, supports the yen on risk-off flows, and paradoxically could still weaken the dollar if the market prices in the fiscal cost of another Middle East engagement. Either outcome is structurally consistent with our Q2 thesis: bearish dollar.
The CFTC's Commitments of Traders report (data as of Feb 17, released Feb 20) showed aggregate FX futures traders net-short the dollar by $22.8 billion — the most bearish positioning since March 2021. The prior week's reading was $20.5 billion, meaning short exposure deepened by $2.3 billion in a single week.
The details matter. EUR/USD large speculator net-long positioning is near a three-year high, with gross longs at a fresh record. Asset managers increased net-short dollar index exposure to a 19-week high. By almost any metric, the short-USD trade is now a consensus position.
This is where it gets interesting for our thesis. We remain structurally bearish the dollar — the fundamental case hasn't changed. But crowded positioning creates mechanical squeeze risk. The rallies to 98.00 this week were likely short-covering, and they exhausted within sessions. But a genuine catalyst — a hot PPI print, a hawkish Fed surprise, or an Iran deal that resets risk appetite — could trigger a more violent unwind toward 98.5+ before the structural downtrend reasserts itself.
Friday's COT update (reporting positions as of Feb 24) will capture any repositioning around the SOTU and tariff escalation. We'll be watching for whether the short-USD trade extended further or whether the bounce prompted trimming.
A quick note on the risk backdrop. Nvidia reported Q4 earnings Wednesday after the close: $68.1 billion in revenue (versus $66.2 billion expected), with data center revenue up 75% year-on-year to $62.3 billion. Q1 guidance came in at $78 billion — well above consensus. Vera Rubin samples have shipped. The AI capex cycle remains intact.
Why does this matter for FX? The S&P 500 is printing new highs, and VIX fell below 18 during Thursday's session. A risk-on equity environment typically pressures safe-haven demand for the dollar and supports carry trades — which is directionally consistent with our bearish-dollar framework. The correlation isn't mechanical, but the mood matters: when Nvidia beats and equities rip, the dollar rarely rallies.