There’s a lot to be concerned about all of a sudden, even if Friday’s session belied the sense of angst that prevailed mid-week.

Over the past 72 hours, investors were compelled to grapple with i) a hawkish Fed awake to the possibility that core inflation in the US may overshoot for the foreseeable future, necessitating a shallower rate-cutting path in 2025, and ii) a preview of chaos to come in D.C., where the US government’s now beholden to the whims of not one, but two notoriously mercurial billionaires, both seemingly determined to engineer drama for the sake of it.

Notwithstanding a meaningful pullback on Friday following an unexpectedly soft read on the very same core PCE price gauge the Fed’s worried may stay elevated, the dollar was on track for another weekly gain. As the simple figure below shows, the greenback’s only had one down week since late September.

Remember: The world’s a friendlier place when the greenback’s on the back foot. It’s on the front foot right now, and squarely so, Friday aside.

Generally speaking, US monetary policy and yield differentials will determine the dollar’s fate. You’re not going to get greenback weakness due to D.C. dysfunction. There’s no way to hedge the de facto dissolution of America’s system of governance, and even if there was, those sorts of doomsday bets won’t manifest as dollar shorts.

If anything, D.C. drama has the potential to drive a stronger dollar in the near-term if it drives up US yields. 10-year yields were 17bps higher on the week before Friday’s modest rally, reals 21bps. At 2.28%, reals were the highest since April, the last time the Fed was worried about an inflation re-heat.

Note from the chart that the recent increase is rather steep.

Between the stronger dollar and higher US reals, financial conditions are tighter and again setting aside the vagaries of Friday’s predictably unpredictable, options-driven pre-Christmas trade, risk sentiment feels shakier than it did prior to the December FOMC meeting (and prior to the D.C. soap opera).

With equity multiples at nosebleed levels, some worry the margin for error’s thin. As BofA’s Michael Hartnett put it, describing the zeitgeist, real rates approaching 2.5% and the S&P trading on a trailing PE of 25x means this “ain’t a great time for the Fed and the US government to lose control of the bond market.”