Dollar fragile as investors weigh Iran sanctions, Treasury buybacks

On Tuesday (Aug 25), the US dollar held steady, yet remained vulnerable to further drops as investors assessed Washington's toughened sanctions on Iran and the Treasury's renewed initiative to manage longer-dated bond yields. US Treasury Secretary Scott Bessent's announcement of doubling quarterly repurchases of longer-dated bonds earlier in the week unsettled investors, raising concerns about a more hands-on approach to curb borrowing costs ahead of mid-term elections later this year.

A CNBC report on Monday revealed the Treasury might utilize a portion of its cash reserves to buy back longer-dated bonds, which helped anchor long-term yields. However, investors anticipate a series of factors that could keep the dollar under pressure throughout the year. "Trump wants borrowing costs down," commented David Morrison, a senior market analyst at Trade Nation.

"I imagine he appreciates the fact that the Fed can only really control the overnight rates. And so why wouldn't the Treasury get in there and attempt to push yields at the longer end down?". A softer dollar would be beneficial for the administration aiming to encourage US companies to export. Moreover, traders have also reduced expectations for an imminent interest rate hike by the Federal Reserve, with the likelihood of a 25 basis point increase in September now at around 40%, down from 67% earlier in the month, according to the CME Group's FedWatch Tool.

The euro slipped slightly to US$1.1663, continuing a second day of decline after reaching a three-month peak the previous day. Meanwhile, the British pound strengthened to US$1.3635. Currency traders processed the ramifications of the US-Iran sanctions announcement, which did not mention major trading partners like China. Treasury Secretary Bessent cautioned nations to sever business ties with Iran or face exclusion from the dollar-based financial system.

Currency traders also deliberated the implications of the ongoing trade dispute between the US and Canada. The Canadian dollar weakened for the second consecutive day against the US dollar, reaching a US$1.3860, after gaining 0.6% on Monday, marking its biggest single-day gain in two months. The US dollar also rose 0.1% against the Japanese yen, trading at 159.215.

The yen has experienced a period of stability, having retreated from its multi-decade low of about 164, which it reached before Japanese authorities intervened in the markets. The dollar's weakness contributed to gains in the cryptocurrency market, with Bitcoin briefly surpassing the US$80,000 mark, marking its first appearance in this price range since mid-May, marking a nearly 30% gain for the month. Ethereum edged up and was close to its January high.