What Changed in August
The greenback extended its decline into a second month as Washington's intent to accelerate buybacks of government debt pressured the currency. The Bloomberg Dollar Spot Index slipped 0.9% in August after a 1.3% retreat the month before.
The gauge has fallen in five of the year's eight months, marking the longest downswing since February. Following the Treasury's move, hedge funds, traditional asset managers, and other speculative accounts cut back on net long dollar wagers.
Early in the month, markets were jolted when Treasury Secretary Scott Bessent unveiled an intention to increase purchases of government bonds, reigniting speculation that policy could tilt toward a weaker dollar. On Monday, he added that he and Federal Reserve Chairman Kevin Warsh are "on the same page" on bonds.
The Policy Cross Currents
The dollar eased 0.2% on Monday, giving back part of Friday's advance that had followed Warsh's vow to bring inflation back to the Fed's 2% target, a level price growth has exceeded for more than five years. In response, traders boosted expectations for tightening this year, with market pricing now implying odds above 50% for a September hike.
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Bloomberg Macro Strategist Tatiana Darie noted that Warsh's reaffirmation has helped calm worries about the Fed's policy credibility, while Bessent's latest remarks highlight a different policy risk hanging over the dollar due to his interventionist posture.
The dollar index's one-month implied volatility increased across the past two sessions.
What to Watch Next
Attention shifts to Friday's US jobs report to gauge the latest state of the economy. With Warsh's aversion to forward guidance, each data release carries added market impact.
"The dollar will weaken in September as the Fed likely won't deliver on the hikes that are priced," said Wells Fargo strategist Erik Nelson. Bank of America foreign-exchange strategist Alex Cohen said, "US data for August will be key," adding, "Soft employment and inflation can keep hikes at bay, but anything to the upside will tee up another major credibility test for the Fed."
