Dollar Falls on Debt Concerns as Yields Rise (24 – 28 August)

Global markets entered the week with the US dollar under continued pressure as concerns over federal debt and Treasury market management moved to the center of investor attention. The Dollar Index hovered near 98.8 following sharp losses in the previous week, while the US Treasury’s expanded bond buyback programme pushed longer-term yields and the dollar lower. The move supported gold, silver, and major currencies, while investors assessed its longer-term implications for US borrowing costs and the yield curve.

Monetary policy expectations remain another major driver. The Federal Reserve kept rates at 3.50%–3.75% in July, but three FOMC members supported a 25-basis-point increase, leaving a September move on the table. Markets are also pricing further tightening in Europe and the UK, while expectations for a September Bank of Japan hike have increased sharply. Meanwhile, Middle East tensions remain an important inflation risk as Washington prepares tougher sanctions against Iran and traffic through the Strait of Hormuz remains below normal levels.

Market Drivers & Catalysts

• US Debt Concerns: Federal debt has climbed above $40 trillion, increasing investor concerns about fiscal sustainability and the supply of long-duration government debt.
• Treasury Buyback Expansion: The US Treasury unexpectedly announced that it would double purchases of longer-dated bonds as part of Treasury Secretary Scott Bessent’s “Treasury twist” strategy, aimed at improving liquidity and influencing the yield curve.
• Fed Policy Outlook: The Fed maintained rates at 3.50%–3.75% for a fifth consecutive meeting in July. Three FOMC members favored a 25-basis-point hike, keeping September tightening in consideration.
• BOJ Rate Hike Expectations: Markets now assign an 82% probability to a September BOJ rate increase, compared with just 23% before the July meeting, with the policy rate expected to rise to 1.25%.
• Iran Sanctions: The US is preparing tougher sanctions against Iran, with Treasury Secretary Bessent promising the “toughest” sanctions yet. Iranian oil shipments have already declined sharply, while Strait of Hormuz traffic remains below normal.
• European Tightening Expectations: Eurozone inflation remains above the ECB’s 2% target, while UK markets price one BoE hike by year-end and another by April.

Fixed Income

• US 10-Year Treasury Note Yield: The US 10-year Treasury yield fell to around 4.71%, retreating after two consecutive sessions of gains as investors turned their attention to Fed Chair Kevin Warsh’s Jackson Hole remarks. Persistent inflation and mounting fiscal concerns remained important drivers, with federal debt exceeding $40 trillion. The Treasury’s expanded bond buyback programme provided only temporary relief to the market. Investors are also focused on July PCE inflation data for further guidance on the Fed’s policy outlook.
• UK 10-Year Bond Yield: The UK 10-year gilt yield climbed to around 5.06% as higher oil prices reinforced concerns over inflation and monetary policy. Rising energy costs remain particularly important for the UK as a net oil importer that continues to struggle with above-target inflation. Consumer inflation reached a four-month high in July despite some cooling in labor market conditions. Markets currently price one Bank of England rate hike by year-end and another by April, while gilt yields also followed broader pressure across global bond markets as the initial impact of the US Treasury buyback programme faded.
• Japan 10-Year Government Bond Yield: Japan’s 10-year government bond yield rose to around 2.89% as expectations for a September BOJ rate increase continued to strengthen. Markets now assign an 82% probability to a hike, sharply higher than 23% before July’s meeting. Investors are looking to Deputy Governor Ryozo Himino’s Thursday speech for further policy signals. Persistent inflation and fiscal concerns also supported yields, with the Finance Ministry considering raising its assumed interest rate for government debt-servicing costs to 3.8% for fiscal 2027.
• Germany 10-Year Bund Yield: Germany’s 10-year Bund yield held near 3.2625%, its highest level since March 2011, as a diplomatic deadlock in the Gulf pushed oil prices higher and reinforced inflation concerns. Eurozone inflation remains above the ECB’s 2% target, keeping further tightening in focus following June’s rate increase. However, consumer inflation expectations declined for a third consecutive month in July. Eurozone business activity expanded further in August, led by stronger German manufacturing, while volatility across global bond markets remained elevated.

Commodities

Gold climbed to around $4,650 per ounce, extending the previous week’s gains and reaching its highest level since mid-May. Concerns over US debt management intensified after the Treasury unexpectedly expanded purchases of longer-dated government bonds, pushing yields and the dollar lower and reviving the debasement trade. Potential new US sanctions on Iran added another source of geopolitical demand by increasing risks to global oil supplies. Investors are also focused on July PCE inflation and Fed Chair Kevin Warsh’s Jackson Hole remarks.

Silver traded above $69 per ounce, remaining near a two-month high as concerns over US debt management continued to support precious metals. The Treasury’s decision to increase longer-dated bond buybacks pushed yields and the dollar lower, strengthening the debasement trade. Prospective US sanctions against Iran also increased concerns over oil supplies and geopolitical uncertainty, while markets awaited US PCE inflation and Warsh’s Jackson Hole remarks.

Currencies

• U.S. Dollar Index (DXY): The Dollar Index hovered near 98.8, remaining under pressure following sharp losses in the previous week. Rising Treasury yields heightened concerns about mounting US debt, while Treasury Secretary Scott Bessent’s “Treasury twist” bond buyback strategy sought to influence the shape of the yield curve. Investors are also monitoring tensions in the Middle East ahead of new US sanctions on Iran, as well as July PCE inflation data and Fed Chair Kevin Warsh’s Jackson Hole remarks.
• Euro: The euro strengthened above $1.1680, reaching its highest level since May as improving European economic data combined with a weaker dollar. Eurozone business activity expanded further in August, led by a significant improvement in German manufacturing, while services growth remained modest. Eurozone inflation expectations eased slightly to 2.9% from 3.0%, although they remained above the ECB’s 2% target, keeping expectations for further monetary tightening alive.
• British Pound: Sterling climbed above $1.363, reaching a six-month high as broad dollar weakness supported major currencies. The pound benefited after the US Treasury unexpectedly announced a doubling of longer-dated bond purchases to improve liquidity and contain borrowing costs. UK inflation remained elevated and reached a four-month high in July despite signs of cooling in the labor market. Markets continue to price one Bank of England rate increase by year-end and another by April.
• Japanese Yen: The yen held near 158.9 per dollar, supported by growing expectations for an earlier Bank of Japan rate increase. Markets now price an 82% probability of a September hike, compared with 23% before the July meeting, with the policy rate expected to rise to 1.25%. Investors are awaiting Deputy Governor Himino’s speech on Thursday for further signals, while broader dollar weakness also supported the currency.

Economic Data Highlights

• Federal Reserve Interest Rate Decision: The Fed maintained its policy rate at 3.50%–3.75% for a fifth consecutive meeting in July. Three FOMC members dissented and favored a 25-basis-point increase, keeping the possibility of September tightening alive. Policymakers cited solid economic activity, strong productivity and investment, stable employment gains, and inflation remaining above target, partly because of energy-related supply shocks.
• UK Inflation (July): Annual inflation accelerated to 2.9%, a four-month high, from 2.6% in June, matching expectations. Housing and household services were the largest contributors after the Ofgem energy price cap increased 13%, while gas prices surged 14.7%. Furniture, clothing, alcohol, and healthcare costs also increased. Transport inflation moderated because of lower fuel prices, while food inflation slowed to 1.3%.
• Japan Inflation (July): Annual inflation accelerated to 1.9%, its highest level since December 2025, as electricity prices declined more slowly following a reduction in energy subsidies. Food, transport, household goods, healthcare, and recreation costs also increased. Core inflation climbed to 1.8%, matching forecasts and reaching its highest level since March, although it remained below the BOJ’s 2% target for a sixth consecutive month.
• China Retail Sales (July): Retail sales increased just 0.6% year-on-year, slowing from 1.0% in June and missing expectations for 1.5% growth. Auto sales plunged 17%, while petroleum, furniture, and building materials also declined. Communication equipment, cosmetics, and food recorded gains. Excluding autos, retail sales increased 2.5%, while total sales for January through July rose 1.2%.

Macro Calendar Highlights

• US Consumer Confidence
• New Home Sales
• US Durable Goods Orders
• Crude Oil Inventories
• US Q2 GDP
• Initial Jobless Claims
• BOJ Deputy Governor Himino Speech
• US PCE Price Index
• Core PCE Price Index
• Personal Income
• Personal Spending
• University of Michigan Consumer Sentiment