Also, the "gee, it could be wordplay" aspect is a convenient excuse. First off, Final Jeopardy rarely has cutesy categories.
Plus, we know they mined the J-Archive. (Aside: has anyone else? Got a zipfile? I would love it.) I mean, look at this, it's not like "U.S. Cities" is an obscure category, even counting only Final Jeopardy! appearances:
http://www.j-archive.com/showgame.php?game_id=1680 http://www.j-archive.com/showgame.php?game_id=695 http://www.j-archive.com/showgame.php?game_id=132 http://www.j-archive.com/showgame.php?game_id=2040 http://www.j-archive.com/showgame.php?game_id=2034 http://www.j-archive.com/showgame.php?game_id=3107 http://www.j-archive.com/showgame.php?game_id=287 http://www.j-archive.com/showgame.php?game_id=691
There are probably more but you get the idea. Any category that comes up that often is going to be pretty indicative of the subject, and Watson can see that the responses in this category pretty strongly fit the subject.