US Dollar Slips Amid Iran Sanctions, Treasury Moves and Trade Tensions
Market Reactions to US Dollar Developments
By Chuck Mikolajczak
Dollar Movement and Treasury Actions
NEW YORK, Aug 25 (Reuters) - The U.S. dollar was slightly lower on Tuesday, as investors weighed Washington's expanded sanctions against Iran and renewed efforts to ease pressure on longer-dated Treasury yields.
The greenback had stumbled late last week after U.S. Treasury Secretary Scott Bessent said the Treasury would double the size of quarterly repurchases of longer-dated bonds, sparking concerns that a shift to a more direct strategy to mitigate the rise in borrowing costs could lead to a debasement of the dollar.
A CNBC report on Monday that the Treasury could use part of its cash balance to buy back longer-dated bonds, along with a drop in crude oil prices, helped send yields lower Monday, a move that continued for a second day.
Expert Insights on Dollar Fundamentals
"The fundamentals seem to move against the dollar — whether it's Bessent, whether it's that the other central banks expect to raise rates more than the Fed — so the fundamentals are negative. But the dollar is overstretched, the momentum indicators are oversold for the dollar," said Marc Chandler, chief market strategist at Bannockburn Capital Markets in New York.
"So to me, that's the tension that you've got: dollar oversold technicals and bearish fundamentals."
Federal Reserve Rate Hike Expectations
Expectations for an interest rate hike by the Federal Reserve at its September meeting have also eased, pricing in a 40.1% chance for an increase of at least 25 basis points, down from about 55% a month ago, according to CME FedWatch.
Impact of Iran Sanctions
Tehran's Response and Market Effects
TEHRAN VOWS RESISTANCE TO SANCTIONS
The dollar index, which measures the greenback against a basket of currencies, edged down 0.07% to 98.92, with the euro up 0.09% at $1.1673.
The expansion of sanctions against Iran unveiled on Monday, which the country vowed to resist, was seen as short on details as it did not have any mention of major trade partners such as China. Despite holding off on the harshest penalties, Bessent warned countries to cut business ties with Tehran or risk being forced out of the dollar-based financial system.
Trade Tensions with Canada
Escalation of Tariffs
CANADA TARIFF TENSIONS ESCALATE
The Canadian dollar strengthened 0.1% versus the greenback to C$1.383 per dollar after seeing its largest drop since June 17 on Monday after trade talks between the U.S. and Canada collapsed, prompting the U.S. to slap 50% levies on some items. U.S. President Donald Trump subsequently announced on Monday that the U.S. would increase tariffs to 50% on all cars, trucks, automotive parts and steel from Canada starting January 1, 2027.
Canada's Retaliatory Measures
Canada hit back with retaliatory tariffs on about $20 billion worth of U.S. annual imports and rolled out aid for businesses and workers, matching Washington's latest duties dollar-for-dollar.
Analyst and Economist Perspectives
Analysts at Goldman Sachs said that while the escalation in trade tensions drove underperformance in the Canadian dollar to start the week, the move was relatively muted and was "likely signaling some continued expectation for an ultimate resolution" as well as the adjustments made by Canadian businesses to their supply chains over the past year.
Economists at UBS slightly cut their economic growth estimate for Canada this year to 0.9% from 1% due to the tariff escalation, but noted the negative impact could be larger.
Other Currency and Market Movements
Global Currency Shifts
The Japanese yen weakened 0.06% against the greenback to 159.22 per dollar while sterling strengthened 0.1% to $1.3644.
Cryptocurrency Market Response
Worries about the broader weakness in the dollar have been a boon to the cryptocurrency market recently, with bitcoin up 0.43% to $79,259.06 after climbing to a more than three-month high of $81,237.94.
Looking Ahead: Federal Reserve and Market Outlook
Upcoming Fed Commentary
Later in the week, market participants will look for clues on the path of interest rates when Federal Reserve Chairman Kevin Warsh speaks in Jackson Hole, Wyoming, on Friday, although several economists have expressed doubt the central bank head will offer any policy outlook.
(Reporting by Chuck Mikolajczak; additional reporting by Jiaxing Li in Hong Kong and Johann M Cherian in Bengaluru; Editing by Andrew Heavens, Nick Zieminski and Daniel Wallis)