USD: Dollar weakness exposes US policy premium
The dollar remains near three-month lows even as US real yields climb. The 10-year real yield has risen about 70 basis points from its 18-month low, while DXY is trading around 99. Similar real-rate moves generated considerably more dollar strength in 2018 and 2022. The weaker response now suggests that investors are separating the return available on Treasuries from their broader assessment of US policy risk.
The latest Treasury buyback announcement highlighted that distinction. The expansion of long-end operations beginning September 9 briefly pulled yields lower, but much of the move in the 30-year was subsequently reversed. The program may ease pressure in less-liquid securities and improve execution at the long end, but it does not alter the volume of debt the private sector must ultimately finance. It may also complicate the market signal by introducing another policy influence over long-term borrowing costs.
The rise in yields should not be interpreted solely as a fiscal revolt. The expected path of monetary policy has also shifted higher as the economy continues to absorb restrictive rates, inflation remains above target and expectations for near-term easing fade.
Under a scenario in which the nominal equilibrium policy rate is around 3.7%, a 10-year yield in the high-4% range is economically plausible. The San Francisco Fed’s model decomposition supports that broad interpretation: on August 21, its model divided a 4.81% 10-year yield into a 3.45% average expected overnight rate and a 1.36% term-premium component. Current valuations therefore reflect a meaningful reassessment of the future policy path, not just concern over federal borrowing.
The buyer base is also becoming less supportive. Last week, we argued that Uncle Sam is now competing with deep-pocketed tech giants for global capital. The Dallas Fed estimates that AI-related investment-grade issuance could reach $300 billion in 2026 and generate as much as $360 billion in 10-year-equivalent duration supply, or about one-eighth of the duration supplied by Treasury issuance.
At the same time, higher Japanese yields also improve the relative appeal of domestic assets for Japanese institutions, particularly after accounting for hedging costs and currency exposure. Neither development implies an abrupt withdrawal from Treasuries, but both reduce the certainty that historical sources of demand will absorb additional US issuance on the same terms.
This changing mix helps explain the dollar’s unusual behaviour. Higher US yields still offer carry and may establish a floor under the currency, but the composition of the increase is becoming less supportive. A rise driven by economic outperformance and a credible monetary response normally strengthens the dollar. A rise that also includes compensation for fiscal uncertainty, supply absorption and unpredictable policy intervention has a less straightforward FX impact.
Trade and geopolitical tensions add further crosscurrents and narrative volatility. The collapse of US-Canada trade talks threatens regional growth, while tougher Iran sanctions could lift oil prices and oil-linked dollar demand. The PCE report on Wednesday and Jackson Hole on Friday may decide whether DXY breaks below 98.80 or recovers toward 100. Until the US policy premium narrows, however, rallies toward 100 should remain tactical and vulnerable to reversal.
EUR: EUR/USD consolidates below 1.17 ahead of Jackson Hole
The euro has been consolidating against the dollar just below 1.17 after breaking through 1.16 last week on broad-based dollar weakness. Debasement-trade chatter, with the dollar increasingly viewed as the long-term victim, has intensified following Treasury Secretary Scott Bessent’s announcement of an expanded Treasury buyback programme aimed at easing pressure on long-end yields.
We do not expect EUR/USD to stray far ahead of the Jackson Hole symposium later this week. Warsh’s keynote will be closely scrutinised at a time when the new leadership’s inflation-fighting credentials are under the microscope. That said, markets may be hoping for clarity that never comes. Warsh has been clear about scaling back forward guidance and, beyond reiterating the Fed’s commitment to containing inflation, which he has already done, we do not expect much new from him. In that sense, the event is likely to leave markets unsatisfied and could prove dollar-negative.
The bigger question is how long it takes markets to adjust to this new policy framework, and what it ultimately means for the dollar as its credibility comes under renewed scrutiny.
Elsewhere, escalating US-Canada trade tensions (see USD section) have pushed EUR/CAD to a three-week high, although the cross remains broadly confined to its 1.60-1.62 range in 2026.
CHF: Fiscal fears boost the franc
Renewed concerns over the US debt burden have revived one of the standout winners of the 2025 de-dollarisation trade: the Swiss franc. The currency took a back seat in the first half of 2026 as the Middle East conflict eroded its safe-haven appeal, given Switzerland’s dependence on imported energy and its relatively small size in absorbing external shocks. But when concerns about fiscal sustainability and policy credibility resurface, with the dollar increasingly cast as the main casualty, the franc tends to regain its shine.
USD/CHF fell 1.5% last week after the sharp dollar sell-off on 19 August, though it has since clawed back part of those losses. It still looks too early to call for a sustained CHF rally. Geopolitical risks remain elevated, suggesting that higher oil prices should continue to cap the franc’s upside.
Nonetheless, the franc may still have scope for near-term gains as investors receive fresh updates on the Treasury’s plans to address elevated borrowing costs and, most importantly, hear from Fed Governor Warsh in the coming days.
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Calendar: August 24-28
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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.
