During Tuesday's European trading session, the dollar index climbed steadily, hovering near 99.00, though whether the momentum can be sustained remains uncertain. Investors are digesting the latest moves to expand sanctions against Iran and alleviate pressure on long-end Treasury yields. Treasury Secretary Bessent announced Monday the broadening of sanctions on Iran, warning nations to sever commercial ties with Tehran or risk being excluded from the dollar-based financial system.

The interplay of sanctions and buybacks is reshaping market dynamics. U.S. Treasury Secretary Bessent declared expanded sanctions against Iran on Monday, explicitly warning that countries must cut commercial links with Tehran or face exclusion from the dollar system. This statement quickly triggered a reassessment of global capital flows and dollar demand. The head of foreign exchange strategy at National Australia Bank noted, "This could be a source of a modest reversal in dollar weakness—if you risk being sanctioned and cut off from dollars, it's better to buy some dollars before sanctions take effect." Market interpretation suggests the potential threat of secondary sanctions could prompt some overseas institutions to build dollar holdings in advance to hedge against liquidity disruption risks. Meanwhile, Treasury buyback operations intertwined with sanction headlines have provided some short-term support for the dollar, but the overall impact remains constrained by broader policy and fiscal uncertainties, resulting in a cautious upward trajectory.

Treasury buybacks offer temporary support, yet yields remain elevated. U.S. Treasuries found some footing following media reports that the Treasury Department might tap a portion of its cash balance to repurchase long-dated bonds, aiming to reduce borrowing costs. This follows Bessent's surprise announcement last week to double the size of quarterly long-bond buybacks, a move occurring as yields reached their highest levels in nearly two decades, intended to ease concerns over excessively rapid increases in long-term rates. However, the support is limited—the 2-year yield held steady at 4.246%, while the 10-year yield stood at 4.704%, still elevated. High yields continue to attract capital flows into the Treasury market, but they also reflect deeper market anxieties over U.S. fiscal sustainability and persistent inflation. Policy uncertainty is curbing the dollar's upside potential, limiting its ability to extend gains beyond the 99 level, with the dollar likely to remain range-bound in the near term.

Jackson Hole takes center stage, with Warsh's speech drawing intense scrutiny. Markets are focused on Federal Reserve Chair Warsh's inaugural address at Jackson Hole on Thursday. A foreign exchange strategist at OCBC Bank commented, "Uncertainty over the Fed's reaction function, combined with growing skepticism about its commitment to prioritizing inflation, has put markets on high alert for Warsh's upcoming speech. Policy uncertainty is capping the dollar's upside." Investors are looking for clues from Warsh's remarks on the recent surge in bond yields and whether he can clearly demonstrate a policy stance independent of the Trump administration. If Warsh reiterates a firm commitment to inflation and strikes a hawkish tone, it could briefly boost the dollar; if his language leans dovish or sidesteps key issues, it may intensify doubts about Fed independence and further dampen dollar momentum. This speech will serve as a critical short-term guide for the currency's direction.

Institutional perspectives offer varied outlooks. Citigroup's currency strategy team recently indicated that markets are positioning for a softening of the Fed's hawkish stance, the U.S. midterm elections, and expanded Treasury long-bond buybacks. Bessent's push to double repurchases of 10-to-30-year bonds aims to lower long-term borrowing costs but may come at the expense of dollar weakness, raising concerns of "financial repression." Citi stated that while it remains constructive on U.S. relative growth advantages over the long run, short-term fiscal operations and policy uncertainty are emerging as primary headwinds for the dollar, with the dollar index likely facing sustained pressure within the 98-100 range. UBS Wealth Management's Chief Investment Office believes the dollar shows some near-term resilience but will trend weaker over the medium to long term. Fiscal concerns persist, with the 30-year Treasury yield briefly touching its highest level since 2001, reflecting rising compensation demands from investors for deficit financing. Combined with already elevated global allocations to dollar assets, this constitutes a structural headwind. As U.S. inflation likely cools further in coming months, the Fed may remain on hold, and falling yields would drive broader dollar depreciation. UBS advises investors to seek diversification beyond the dollar, favoring high-yielding currencies for carry returns, and views them as attractive from a total return perspective in a range-bound FX market.

In summary, the dollar index is currently trading near 99.00, with sanctions and buybacks providing support at this level. Bessent's expanded sanctions on Iran could push some nations to pre-purchase dollars, offering short-term support; Treasury buyback news provides a temporary lift, but yields remain elevated. Markets are focused on Warsh's Jackson Hole speech Thursday, with policy uncertainty limiting further upside for the dollar.