This week's core tension in the foreign exchange market isn't about the level of interest rates themselves, but rather the transmission path of U.S. fiscal policy. The bond repurchase program aimed at suppressing long-end yields has instead shaken market confidence in the coordination between U.S. fiscal and monetary policy, turning the dollar into the outlet for this pressure.

The Federal Reserve Chair's remarks at the Jackson Hole symposium will be the key short-term variable, yet whether the dollar can stabilize may hinge more on how markets reassess the fiscal outlook. Among non-U.S. currencies, the technical setups for the euro, British pound, and Australian dollar all look firm, but volatility could increase as they approach previous highs, and the relative resilience of commodity currencies remains worth monitoring.

Dollar Index: Bond Buyback Plan Triggers Fiscal Confidence Gap, Index Breaks Key Support Level

The dollar index extended its decline this week. On the daily chart, the index has been trending lower since hitting a high near 101.80 in July, and has recently weakened further, breaking below the 99 handle, with the MACD maintaining a bearish stance. On the weekly timeframe, it fell approximately 0.8%, and on the monthly timeframe, it declined about 1.2%, leaving the technical picture weak.

In terms of catalysts, the U.S. Treasury Secretary indicated mid-week that the scale of longer-dated Treasury buybacks could be expanded further, following a prior commitment to at least double the size of such purchases to curb the rise in yields. However, long-term Treasury yields rose sharply this week anyway, with the 30-year yield touching its highest level since 2007 at one point. Concerns cited by traders include a deteriorating fiscal outlook, heavy issuance volumes, geopolitical risks, and uncertainty over the Fed's policy path. In the end, the buyback program neither effectively capped yields nor alleviated pressure; it merely shifted fiscal strain onto the currency.

On the institutional front, one FX strategist remarked that efforts to push down U.S. yields have had little impact on Treasury rates but have weakened the dollar, and markets are now pushing back. Another institution noted in a report that dollar risks are slightly skewed to the downside; any hawkish clarification on anti-inflation credibility may only provide limited support for the greenback, while a failure to address that credibility issue could expose the currency to more significant pressure. Federal funds futures show market pricing for a September rate hike at around 40%, with December expectations rising to 72%, yet the dollar has not drawn support from this, reflecting a market focus that has shifted from the pure rate path toward fiscal and credibility dimensions.

Euro and Sterling: Core Non-U.S. Currencies Ride the Momentum, Approaching Milestone Highs

EUR/USD climbed back above the 1.16 level this week, earlier touching its highest point since mid-May, with the weekly gain around 1.0% and the monthly rise near 1.4%. The daily structure has reversed upward from the early-July low, with a recent sharp rally and strengthening MACD momentum, and the pair is now trading close to the prior high near 1.1796. The euro's strength is primarily driven by dollar weakness, though the eurozone's August manufacturing PMI rising to a 54-month high and improving external demand expectations have provided some fundamental support.

GBP/USD advanced to its strongest level since mid-February, up roughly 0.8% on the week and about 1.3% on the month. The daily chart shows an oscillating uptrend from the 1.3139 low, repeatedly marking new cyclical highs with ample MACD momentum, and the pair is now near the previous high around 1.3657. Sterling lacks fresh domestic catalysts; its upside is coming mainly from dollar softness and improved risk sentiment, rather than any major shift in UK policy expectations.

Yen and Commodity Currencies: Faster Inflation Lifts Yen, Commodity-Linked Units Show Greater Flexibility

USD/JPY edged lower this week, trading around the 159 area. Japan's core consumer inflation accelerated in July, providing the Bank of Japan with a rationale for rate hikes and generating short-term buying interest in the yen. However, the effects of the joint U.S.-Japan intervention are still being absorbed, and investors broadly believe the yen could resume its weakening trend unless the BOJ clearly tightens policy. A private bank strategist suggested the yen still has room to be rescued, but the move will not be one-directional; if markets perceive the BOJ's stance as more symmetrical, meaning it will act to curb inflationary pressures, that would help underpin the yen. The BOJ's next policy meeting is scheduled for mid-September.

Among commodity currencies, AUD/USD gained about 1.3% on the week and 2.1% on the month, the strongest performance among major non-U.S. currencies. USD/CAD fell roughly 0.8% weekly and 1.9% monthly, while USD/CHF dropped about 1.3% on the week and 0.9% on the month. Firm commodity prices, improved risk appetite, and a weaker dollar have jointly lifted commodity currencies like the Australian and Canadian dollars. The franc, meanwhile, has benefited more from dollar softness and safe-haven rebalancing.

From a technical perspective, the Australian dollar, sterling, and euro are all in uptrends, while USD/CAD and USD/CHF are in downtrends, consistent with the dollar index's weakening trajectory.

Market Q&A

Question One: What is the core reason for the dollar's weakness, and why has the bond buyback program turned into a negative for the greenback?

The core of the dollar's decline lies not in falling yields, but in the policy signal exposed by the buyback program. The U.S. Treasury Secretary attempted to suppress long-end yields by expanding longer-dated Treasury repurchases, but the market read this as a passive response from the fiscal side to rising rates, rather than an improvement in creditworthiness. As a result, long-term yields rose instead of falling, with the 30-year briefly touching its highest level since 2007, showing that concerns about U.S. fiscal sustainability have not eased. In this context, the buyback program failed to address the underlying problem and instead shifted some of the pressure that was concentrated in the bond market onto the exchange rate. One strategist put it bluntly: the effort to push down yields has done little for Treasury rates but has undermined the dollar. Markets are no longer focused solely on the rate path, but on the coordination between U.S. fiscal and monetary policy, and on whether overseas investors remain willing to fund America's deficit. Therefore, after the buyback announcement, the dollar broke below a key support level instead, and non-U.S. currencies took advantage to move higher.

Question Two: How much upside room does the euro have, and what kind of resistance exists near the previous high?

EUR/USD is currently in a strong uptrend, with the daily chart approaching the previous high near 1.1796. The key to the short-term trajectory lies in whether the dollar can stabilize and whether eurozone data can continue to improve. The eurozone's August manufacturing PMI hitting a 54-month high provides fundamental support for the euro, but the ECB's policy path also carries uncertainty. If the dollar sees a technical correction around the Jackson Hole meetings, the euro could face profit-taking pressure near the previous high; if the Fed Chair fails to effectively address anti-inflation credibility, the dollar's weak pattern will persist, and the euro may have room to test higher ranges. Looking across markets, the euro's rise is not merely a passive reaction to dollar weakness; it also prices in a recovery in eurozone manufacturing, so its sustainability depends on shifts in the relative strength of the U.S. and European economies, rather than dollar weakness alone.

Question Three: Why does the yen remain weak even after joint U.S.-Japan intervention, and what is the BOJ's policy path?

The joint intervention briefly supported the yen, but its effect is diminishing because markets are focused on the BOJ's rate trajectory. Japan's July core inflation accelerated, giving the central bank a reason to hike, but the BOJ has yet to signal a clear tightening stance. Investors broadly believe that intervention alone cannot reverse the yen's weakness unless the BOJ responds symmetrically on policy. One strategist noted that if markets believe the BOJ will take measures to curb inflationary pressures, that would help support the yen. The BOJ's next meeting is in mid-September; if it signals a more decisive policy shift then, the yen could attract more sustained buying. If it stays on hold, the yen may slip back into its weakening channel. So the yen's short-term rebound is more of an emotional repair driven by inflation data than a trend reversal.

Question Four: Can the strength of commodity currencies like the Australian and Canadian dollars be sustained?

The strength of the Australian and Canadian dollars first comes from the mirror effect of dollar weakness, and only secondarily from commodity price support. The Australian dollar's monthly gain leads major non-U.S. currencies, and the Canadian dollar has also strengthened noticeably. Commodity prices remain in a relatively strong range, with supply vulnerabilities in crude oil still unresolved, providing indirect support for the loonie; the Aussie, meanwhile, benefits from improved risk appetite and expectations of Asian demand. However, the sustainability of commodity currencies depends on two variables: whether the dollar sees a staged recovery, and whether commodity markets face a cooling in demand. If the dollar stabilizes around the Jackson Hole meetings, commodity currencies could see a pullback; if commodity prices keep climbing and the dollar stays weak, the flexibility of the Aussie and loonie may continue to play out. Technically, both are in uptrends, but volatility could expand as they approach key resistance zones, so linear extrapolation is not advisable.

Question Five: What does the Fed Chair's stance at Jackson Hole mean for the dollar?

The Jackson Hole symposium is a key short-term juncture for the dollar. One institution's report noted that dollar risks are slightly skewed to the downside. If the Fed Chair delivers a hawkish clarification on anti-inflation credibility in the speech, it could provide limited support for the dollar, but markets may view it as a passive response to fiscal pressure, limiting the rebound's strength. If the credibility issue is not effectively addressed, or if the policy path remains vague, the dollar could face more significant pressure. Market pricing currently shows about a 40% chance of a September hike and 72% for December, yet the dollar has not strengthened on this, indicating that the market's focus has shifted from rate levels to policy credibility. Therefore, the impact of the meeting outcome on the dollar may be asymmetric: a mildly hawkish tone is unlikely to reverse the downtrend, while a dovish or ambiguous stance could intensify dollar selling pressure and push non-U.S. currencies like the euro and Aussie higher.