German economic growth stronger than expected despite Iran war

The U.S. dollar experienced a slight increase on Tuesday as investors evaluated Washington's expanded sanctions against Iran and efforts to lower longer-term Treasury yields. Treasury Secretary Scott Bessent had announced a doubling of quarterly repurchases of longer-dated bonds, which initially caused the dollar to decline, raising concerns about potential devaluation.

A CNBC report suggested the Treasury might use part of its cash reserves to buy back longer-dated bonds, alongside a drop in crude oil prices, which helped keep yields low. Both factors contributed to the dollar's favorable technicals, despite negative fundamentals. Marc Chandler, chief market strategist at Bannockburn Capital Markets, noted that the dollar was oversold while the fundamentals were bearish.

The Federal Reserve's interest rate hike expectations for September also softened, with a 40.1% chance of a 25 basis point increase, down from 55% a month prior. The dollar index fell 0.07% to 98.92, with the euro up 0.09% at $1.1673. Iran's unveiled sanctions, which the country vowed to resist, were seen as vague, lacking details on major trade partners like China.

Despite the lack of harsh penalties, Bessent cautioned countries to sever ties with Tehran or risk being excluded from the dollar-based financial system. The Canadian dollar strengthened 0.1% against the greenback to C$1.383 per dollar, following the collapse of trade talks with the U.S. and subsequent 50% levies on certain items.

In response, the U.S. announced a 50% tariff increase on all cars, trucks, automotive parts, and steel from Canada starting January 1, 2027. Canada retaliated with tariffs on $20 billion worth of U.S. annual imports and provided aid to businesses and workers. Goldman Sachs analysts stated that while trade tensions negatively impacted the Canadian dollar initially, the effect was relatively mild and indicated potential for a resolution.

UBS economists lowered Canada's economic growth estimate for the year to 0.9% from 1%, attributing the decline to the tariff escalation. The Japanese yen declined 0.06% against the dollar to 159.22 per dollar, while the British pound strengthened 0.1% to $1.3644. Weakness in the dollar has benefited the cryptocurrency market, with Bitcoin up 0.43% to $79,259.06 after reaching a three-month high of $81,237.94.

Market participants will examine Federal Reserve Chairman Kevin Warsh's speech in Jackson Hole, Wyoming, on Friday, seeking clues regarding interest rate direction, although several economists doubt he will provide a clear policy outlook.