Key Takeaways
- The Dollar gained momentum after Kevin Warsh’s hawkish stance at Jackson Hole, closing the week at 99.7.
- Expectations of a September rate hike increased as Treasury yields rose, with the two-year yield hitting 4.35%.
- Despite Canada’s strong Q2 GDP, US-Canada trade tensions keep the CAD under pressure, as it closed the week above 1.39.
- Despite narrowing yield, the Mexican Peso remains stable at 17.03, supported by carry demand and stable domestic growth.
- Key economic reports this week include manufacturing surveys and both US and Canada employment data on Friday.
USD: Hawkish Warsh revives the Dollar
The dollar ended the week with renewed momentum after Kevin Warsh delivered a hawkish message at Jackson Hole. DXY closed Friday at 99.702, while the USD DXY Index gained 0.6% over the week, its strongest performance since June. Warsh argued that inflation has not slowed enough and reaffirmed the Fed’s commitment to its 2% PCE target. His remarks helped DXY recover from 98.80 and brought the 100.00 level back into view.
Treasury yields moved sharply higher as markets increased bets on a September rate hike. The two-year yield rose 17 basis points to 4.35%, while the 10-year climbed nine basis points to 4.72%. Warsh effectively caught up with the more hawkish parts of the FOMC before the September meeting. His view that financial conditions are not restrictive also suggests that rates could rise without placing immediate pressure on the economy.
However, a sustained dollar rally is not assured. Governor Collins still sees policy as mildly restrictive, while several bond investors argue that markets may be pricing a hike too quickly. There is also tension between Warsh’s inflation stance and Treasury Secretary Scott Bessent’s effort to contain long-term yields through larger bond buybacks. If Warsh retreats from his message, the long end of the Treasury market could come under renewed pressure.
August inflation data will now determine whether DXY can break above its recent range. A firm CPI report would strengthen the case for a September hike and could push the index through 99.73 toward the 100.00 to 100.50 area. A softer release would support the more cautious Fed camp and reopen the 98.80 August low. Higher oil prices or renewed geopolitical stress could also support the dollar through stronger inflation expectations and safe-haven demand.
CAD: Trade escalation keeps USD/CAD supported
USD/CAD closed the week at 1.3905, near the top of its recent 1.3732 to 1.3910 range. That stability is notable given the sharp deterioration in US-Canada trade relations. Canada’s economy continues to provide support, with Q2 GDP expanding at a 3.3% annualized pace, the strongest growth rate since 2023. As a result, the Canadian dollar has avoided the kind of selloff that tariff headlines alone might have produced. Instead, USD/CAD has drifted higher alongside broader US dollar strength, while the August 21 low at 1.3732 remains an important technical floor.
Trade tensions are now the key driver for the medium-term outlook. Negotiations between Washington and Ottawa broke down on August 22, triggering new US tariffs on roughly US$20 billion of Canadian goods and prompting Canada to announce C$27.6 billion in retaliatory measures effective September 8. The dispute has since intensified, with President Trump threatening to lift tariffs on Canadian autos and parts to 50% from January 2027. With both sides digging in, markets are increasingly treating this as a prolonged policy conflict rather than a short-lived negotiating tactic. That shift keeps a risk premium embedded in the Canadian dollar.
Interest rate dynamics are adding another layer of support for USD/CAD. US two-year yields rose more sharply than their Canadian counterparts this week, widening the spread to roughly 134 basis points in favour of the dollar. At the same time, the Bank of Canada faces a difficult balancing act as tariffs weigh on growth while keeping inflation risks elevated. Options markets are pricing uncertainty around the September 8 deadline, but volatility remains far below crisis levels. That suggests investors see downside risks for the loonie, while still acknowledging Canada’s relatively firm domestic backdrop.
The September 8 implementation of Canadian counter-tariffs is the next major test for USD/CAD. Further retaliation from Washington could push the pair through the 1.3910 high and reopen the 1.40 to 1.41 range seen during July’s tariff scare. Any sign of renewed negotiations would likely send USD/CAD back toward the mid-1.37s, though current political signals point the other way. A potential Fed hike in September would reinforce the dollar’s yield advantage and strengthen the bullish case for the pair. Longer term, Canada’s large pipeline of investment projects remains supportive for the currency, but that theme is unlikely to outweigh near-term trade and policy risks.
MXN: Carry keeps the Peso on firm ground
USD/MXN ended the week at 17.036, up 0.88% from its weekly low. Kevin Warsh’s hawkish Jackson Hole speech lifted the odds of a September Fed hike and pushed the pair above 17.00. Still, the peso held up well against the sharp rise in US rates. Mexico’s two-year yield jumped 60 basis points to 7.74%, while Banxico’s decision to hold rates at 6.50% continues to support carry demand. Stronger second-quarter growth and an upgraded 2026 forecast have also improved the domestic outlook.
US inflation will now steer the next move. A firm CPI report could strengthen September hike expectations and push USD/MXN toward 17.20, followed by the 17.50 to 17.68 area. A softer reading would revive demand for the peso and bring the August low near 16.89 back into focus. For now, the move above 17.00 points to fresh pressure on the peso, but carry support remains intact.
What’s happening in markets this week?
The ISM manufacturing survey, Eurozone inflation data and China’s PMIs set the tone on Tuesday, followed by US job openings and Brazil’s GDP on Wednesday. Thursday brings the ISM services survey, European retail sales and Broadcom’s earnings, while US Treasury auctions will test demand for long-term debt and shape the outlook for sovereign yields.
Friday’s US employment report is the main event, with markets looking for payrolls to rebound by 53,000, unemployment to hold at 4.1% and wage growth to reach 0.3%. Oil supply risks, weaker Chinese demand and pressure on the Japanese yen will remain in focus throughout the week, adding further uncertainty across inflation, bond and currency markets.
Market snapshot
Table: Currency trends, trading ranges & technical indicators
Key global risk events
Calendar: August 31 – September 04
All times are in EST
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*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.
