Dollar drifts near 3-month lows on trade retaliation and Iran sanctions threat

The U.S. dollar settled near three-month lows on Monday, with traders on European exchanges accounting for the waning influence of Treasury's buyback program in tandem with escalating trade tensions and impending sanctions. The Dollar Spot Index edged up 0.12% to 98.88, as the greenback failed to rally despite a 1% weekly drop. The Treasury Department's intervention, which doubled the buyback cap to $4 billion per operation, has not met the expectations of currency bulls.

Washington's debt, exceeding $40 trillion, and its annual deficit near $1.8 trillion have kept yields elevated, dampening the dollar's traditional yield advantage. While the broader dollar index remained relatively stable, North American currency pairs experienced significant volatility due to trade policy shocks; the Canadian Dollar fell 0.4% as the USD/CAD pair strengthened following the termination of U.S.-Canada trade talks, with both countries announcing 50% tariffs on $20 billion of each other's imports.

Japan's Yen held steady at 159.00 per dollar as traders refrained from making major bets prior to Bank of Japan Deputy Governor Ryozo Himino's policy guidance announcement. The euro remained virtually flat around $1.17, while the risk-sensitive Australian Dollar edged down 0.1% amid global caution in commodity-based FX. Political events and central bank cues are constraining risk appetite across global trading.

A Treasury Secretary press conference is anticipated to reveal plans for the administration's aggressive economic isolation against Iran, prompting concerns about potential trade disruptions. The crude oil market slipped slightly to $93.05 per barrel due to profit-taking but remains affected by the risk of the Strait of Hormuz. FX traders are also calibrating positions ahead of Nvidia's earnings report and Fed Chair Kevin Warsh's keynote address at the Jackson Hole Economic Policy Symposium.