Dollar trading near multi-month lows, restrained by debt nerves

The dollar found itself near multi-month lows on Monday, as the market remained unsettled. This was largely due to the US Treasury's promise to buy back more long bonds, in addition to traders waiting for details of potential sanctions on Iran and upcoming policy speeches in the US and Japan. The Canadian dollar dropped slightly in early trade, falling 0.2% to C$1.3798 per dollar after trade talks with the US failed to materialize.

Washington then imposed 50% tariffs on Canadian goods, which Canada retaliated against in kind. Meanwhile, the Australian and New Zealand dollars were edging close to three-month highs at $0.7171 and $0.5979, respectively.

The euro remained strong, holding above $1.16 at $1.1685, while the yen stayed relatively stable at around 159 per dollar. Friday's data revealed the strongest US services growth in nearly two years in August, which helped to keep the dollar from falling against bitcoin, which had its largest weekly decline against bitcoin in nearly three-and-a-half years on Sunday.

This decline, coupled with increasing gold prices, indicated that investors were increasingly concerned about the potential negative impacts of a stronger dollar if the US attempts to keep yields under control. The US Treasury's decision to double its buybacks at the long end to $4 billion per operation was seen as a significant interventionist move that spooked traders and negatively impacted the dollar.

Shane Oliver, head of investment strategy at AMP, noted that the US Treasury's efforts to artificially keep long-term bond yields low might be reigniting a trade around US dollar debasement. Meanwhile, UK's sterling was firm at $1.3650 in morning trade, and the Chinese yuan hovered near a 3-year high at 6.7222 per dollar. On Monday, US Treasury Secretary Scott Bessent was set to address the media after vowing "the toughest sanctions in history" against Iran.

Markets were closely watching to see whether he would target China or not. Additionally, Fed Chairman Kevin Warsh was scheduled to speak in Jackson Hole, Wyoming, on Friday, where he would likely face questions about the US Treasury's buybacks and any remarks on the balance sheet, duration supply, or term premium could influence the long end of the yield curve.