Dollar weakens as markets weigh US Treasury buyback program against Iranian tensions.
2026-08-21 19:58:58
On Friday (August 21), during the European session, the dollar resumed its decline even as the market effect of the US Treasury bond buyback gradually subsided; gold still broke through the $4,500 mark due to the impact of the US-Iran tensions pushing up oil prices; expectations of a Bank of Japan interest rate hike increased, but this failed to boost the yen; and US stocks closed lower due to bond market volatility and geopolitical risks. 
The dollar remained under pressure after Bessant discussed bond buybacks. The dollar attempted to stabilize on Thursday, rebounding against the Swiss franc and Japanese yen and halting its decline against the euro. However, it remained weak against riskier currencies like the Australian dollar, New Zealand dollar, and Canadian dollar; today, the dollar weakened again against all major trading counterparts. This brief stabilization may have stemmed from the short-term market impact of the US Treasury's announcement of at least doubling the scale of long-term Treasury bond buybacks. The rise in long-term US Treasuries subsequently subsided, with yields on 10-year and 30-year US Treasuries rebounding. Despite this, US Treasury Secretary Bessant stated overnight that the US might further expand bond buybacks to curb the rapid rise in yields. This may explain the dollar's renewed decline today, even as market expectations for a Fed rate hike in September have slightly increased. According to federal funds rate futures data, the probability of a Fed rate hike in September has risen to 35%, with market pricing indicating a cumulative rate hike of 40 basis points by the end of 2027. The ceasefire agreement expired, and Trump threatened harsher sanctions against Iran. Expectations for a Federal Reserve rate hike rose slightly, possibly related to the deteriorating situation in the Middle East and tense rhetoric between the US and Iran. The temporary ceasefire agreement between the US and Iran expired on Monday, with neither side willing to resume negotiations on the passage of ships through the Strait of Hormuz. Trump stated overnight that "nobody has given Iran such a good opportunity to negotiate," but Iran missed this chance. He pledged to increase sanctions against Iran and warned that any country providing support to Iran would face "extremely severe" economic consequences. Treasury Secretary Bessant also reiterated that the US would impose strict restrictions on Iran, saying these measures might reduce the need for military action. Oil prices remained high, and international gold prices broke through $4,500 . Oil prices continued their upward trend, although the gains slowed today. The ongoing standoff exacerbated market concerns about energy supplies. However, the rise in oil prices did not boost the dollar or depress gold prices. This is because, unless a large-scale military conflict occurs, it is difficult to reignite inflation fears, a point confirmed by weak July inflation data. Gold prices surged today, driven by a weaker dollar, more cautious interest rate hike expectations, and the US Treasury's efforts to suppress long-term yields, all of which lowered the opportunity cost of holding gold. Gold successfully broke through the key $4,500 level and is poised to challenge the May 29 high of around $4,600. A further upward breakout would send a strong bullish signal and could even challenge the May 12 high of $4,775. Meanwhile, expectations for a Bank of Japan rate hike are high, and the yen continues to weaken . The yen continued to depreciate yesterday. This indicates that even with the joint US-Japan currency intervention at the end of July, USD/JPY traders are still inclined to rebuild long dollar positions. Overnight data showed that Japan's core inflation accelerated in July, reinforcing market expectations for a rate hike at the upcoming Bank of Japan meeting. Overnight index swaps (OIS) indicate a 67% probability of a rate hike at this Bank of Japan meeting, with investors expecting a cumulative rate hike of approximately 100 basis points by the end of 2027. However, the market believes the divergence in monetary policy between the Federal Reserve and the Bank of Japan has reached its extreme, which is why traders continue to go long on USD/JPY. Given the current situation, it's unlikely the Bank of Japan will adopt a further hawkish stance. Prime Minister Sanae Takaichi hopes to stimulate the economy through increased fiscal spending, and to raise funds, she needs to maintain low interest rates to ensure the attractiveness of bonds. The Prime Minister could even influence the Bank of Japan's policy decisions by nominating dovish figures to the policy committee. Bond market risks combined with geopolitical uncertainty are putting pressure on the stock market. Tense tensions in the bond market have not eased, and US stocks closed lower yesterday, with the Dow Jones Industrial Average leading the decline. Strong rhetoric regarding the Middle East conflict has also negatively impacted the stock market. Although US stock index futures predict a higher opening today, investors remain concerned about valuations. Rising oil prices have not yet reignited market concerns about inflation and interest rate hikes; however, if the situation deteriorates and expectations of interest rate hikes rise, it will depress the valuations of high-growth technology companies—whose valuations are highly dependent on the discounted value of future cash flows.
The dollar remained under pressure after Bessant discussed bond buybacks. The dollar attempted to stabilize on Thursday, rebounding against the Swiss franc and Japanese yen and halting its decline against the euro. However, it remained weak against riskier currencies like the Australian dollar, New Zealand dollar, and Canadian dollar; today, the dollar weakened again against all major trading counterparts. This brief stabilization may have stemmed from the short-term market impact of the US Treasury's announcement of at least doubling the scale of long-term Treasury bond buybacks. The rise in long-term US Treasuries subsequently subsided, with yields on 10-year and 30-year US Treasuries rebounding. Despite this, US Treasury Secretary Bessant stated overnight that the US might further expand bond buybacks to curb the rapid rise in yields. This may explain the dollar's renewed decline today, even as market expectations for a Fed rate hike in September have slightly increased. According to federal funds rate futures data, the probability of a Fed rate hike in September has risen to 35%, with market pricing indicating a cumulative rate hike of 40 basis points by the end of 2027. The ceasefire agreement expired, and Trump threatened harsher sanctions against Iran. Expectations for a Federal Reserve rate hike rose slightly, possibly related to the deteriorating situation in the Middle East and tense rhetoric between the US and Iran. The temporary ceasefire agreement between the US and Iran expired on Monday, with neither side willing to resume negotiations on the passage of ships through the Strait of Hormuz. Trump stated overnight that "nobody has given Iran such a good opportunity to negotiate," but Iran missed this chance. He pledged to increase sanctions against Iran and warned that any country providing support to Iran would face "extremely severe" economic consequences. Treasury Secretary Bessant also reiterated that the US would impose strict restrictions on Iran, saying these measures might reduce the need for military action. Oil prices remained high, and international gold prices broke through $4,500 . Oil prices continued their upward trend, although the gains slowed today. The ongoing standoff exacerbated market concerns about energy supplies. However, the rise in oil prices did not boost the dollar or depress gold prices. This is because, unless a large-scale military conflict occurs, it is difficult to reignite inflation fears, a point confirmed by weak July inflation data. Gold prices surged today, driven by a weaker dollar, more cautious interest rate hike expectations, and the US Treasury's efforts to suppress long-term yields, all of which lowered the opportunity cost of holding gold. Gold successfully broke through the key $4,500 level and is poised to challenge the May 29 high of around $4,600. A further upward breakout would send a strong bullish signal and could even challenge the May 12 high of $4,775. Meanwhile, expectations for a Bank of Japan rate hike are high, and the yen continues to weaken . The yen continued to depreciate yesterday. This indicates that even with the joint US-Japan currency intervention at the end of July, USD/JPY traders are still inclined to rebuild long dollar positions. Overnight data showed that Japan's core inflation accelerated in July, reinforcing market expectations for a rate hike at the upcoming Bank of Japan meeting. Overnight index swaps (OIS) indicate a 67% probability of a rate hike at this Bank of Japan meeting, with investors expecting a cumulative rate hike of approximately 100 basis points by the end of 2027. However, the market believes the divergence in monetary policy between the Federal Reserve and the Bank of Japan has reached its extreme, which is why traders continue to go long on USD/JPY. Given the current situation, it's unlikely the Bank of Japan will adopt a further hawkish stance. Prime Minister Sanae Takaichi hopes to stimulate the economy through increased fiscal spending, and to raise funds, she needs to maintain low interest rates to ensure the attractiveness of bonds. The Prime Minister could even influence the Bank of Japan's policy decisions by nominating dovish figures to the policy committee. Bond market risks combined with geopolitical uncertainty are putting pressure on the stock market. Tense tensions in the bond market have not eased, and US stocks closed lower yesterday, with the Dow Jones Industrial Average leading the decline. Strong rhetoric regarding the Middle East conflict has also negatively impacted the stock market. Although US stock index futures predict a higher opening today, investors remain concerned about valuations. Rising oil prices have not yet reignited market concerns about inflation and interest rate hikes; however, if the situation deteriorates and expectations of interest rate hikes rise, it will depress the valuations of high-growth technology companies—whose valuations are highly dependent on the discounted value of future cash flows.
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