Dollar faces a defining September

USD: Dollar faces a defining September

The US dollar ended a turbulent August with only a modest loss. The DXY closed at 99.428, down 0.47% over the month, despite trading between 98.800 and 100.014. Treasury actions weighed on the currency by raising fresh questions over US policy credibility. However, Kevin Warsh’s hawkish Jackson Hole speech helped the dollar recover into month-end.

The Treasury’s expanded bond buybacks and possible use of its cash balance carried more value as policy signals than direct FX drivers. Markets saw a risk that these steps could evolve into broader efforts to restrain long-term yields. Such a shift could require closer coordination between the Treasury and the Federal Reserve. In turn, that would deepen concerns over inflation, central bank independence and the dollar’s long-term appeal.

Warsh pushed back against that narrative by reaffirming the Fed’s commitment to its 2% inflation goal. His message drove yields higher, with the two-year ending August at 4.344% and the 10-year at 4.752%. Even so, the dollar has not fully followed the rise in US yields, as investors remain focused on policy credibility rather than rate differentials alone. With policy premium under control of Dollar price discovery, further weakness may require clearer evidence of financial repression or a sharp deterioration in US data.

The renewed conflict around the Strait of Hormuz adds another layer to the outlook. US strikes and Iran’s response lifted oil prices, disrupted shipping and pushed freight costs higher. These pressures could feed into inflation and reinforce Warsh’s case for tighter policy. They could also support the dollar through demand for safety, although a larger energy shock would raise the risk of weaker global growth.

September now turns to the US data and the Fed’s September 16 decision. ISM, JOLTS, jobless claims and the August payrolls report will test whether Warsh’s tougher stance can survive the next data cycle. A firm inflation and employment backdrop could lift DXY above 100 and open a move toward 100.50 to 101.00. Softer data or an easing of tensions in Hormuz could instead send the index back toward 98.80, leaving August’s narrow close as a pause before a clearer break.

CAD: September puts the CAD recovery on trial

The Canadian dollar starts September on firmer ground after gaining 1.37% against the US dollar in August. However, that monthly advance hides a sharp swing from above 1.4060 to a low near 1.3760. Softer US payrolls and improved trade sentiment drove much of the recovery before hawkish Fed expectations revived the dollar late in the month. USD/CAD now trades near 1.3870, while a slightly wider two-year yield gap limits the loonie’s momentum.

Trade policy will set the tone from here. Canada’s counter-tariffs are due to begin on September 8, and Washington has warned that further retaliation could follow. A pause in energy-related measures would reduce the economic damage, but broader negotiations appear unlikely to restart soon. Meanwhile, Prime Minister Carney’s stronger parliamentary position gives Ottawa more room to maintain its current stance.

The domestic economy offers a stronger foundation than the trade headlines suggest. Second-quarter GDP grew by an annualized 3.3%, supported by net exports, business investment and housing. Inventories weighed heavily on growth, yet strong orders suggest companies may begin restocking. Manufacturing, capital spending and exports also retain momentum, while the long housing downturn may be approaching a turning point.

Oil above $91 a barrel adds support through Canada’s export channel, although it also complicates the Bank of Canada’s policy outlook. For USD/CAD, 1.3760 remains the main downside level, while a break above 1.3910 could reopen the 1.40 to 1.41 area. Options markets are already pricing more volatility around the September 8 tariff deadline. Our CAD outlook remains medium-term cautiously constructive, but trade retaliation, US inflation and the next Fed signal will decide whether August’s recovery can extend.

EUR: EUR/USD holds its line

After Friday’s sell-off, triggered by Fed Chair Kevin Warsh’s Jackson Hole remarks, EUR/USD found solid support near 1.1570. The pair still maintains a broadly bullish structure from the late June lows around 1.1320/30.

Since then, the Fed’s hawkish narrative has lost some shine. Despite Warsh’s attempt to rebuild credibility among skeptical investors, yesterday’s price action suggested broader concerns around the US fiscal backdrop, the US Treasury’s interventionist approach, and rising long-end yields may be weighing more heavily on the dollar than a hawkish Fed can support.

Recent comments from Treasury Secretary Bessent at the G20 finance ministers’ gathering may have revived some of those concerns. It’s also telling that while renewed tensions in the Middle East have pushed oil and yields across G10 peers higher, the euro still delivered a strong session yesterday. That suggests rising yields may have been viewed more through a fiscal lens than as a classic risk-off/safe-haven event, which is typically dollar-positive.

Investors may now need that Fed hike to actually materialise before becoming more convinced, allowing yield support for the dollar to find its strength again.

Until then, EUR/USD sellers may be less inclined to engage with much conviction, as the pair remains supported around current levels. The Fed policy meeting on 16 September will be the key test.

Today brings the eurozone’s aggregate August CPI reading, following a run of hotter-than-expected national releases, with yesterday’s German print the latest example. Headline CPI is expected to rise to 3.3% from 2.9%. That should only reinforce the case for an ECB rate hike this month. Markets are already aware of that, however, so don’t expect a meaningful upside reaction in the euro.

Market snapshot

Table: Currency trends, trading ranges & technical indicators

Key global risk events

Calendar: August 31 – September 04

All times are in EST

Have a question? [email protected]

*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.