The US dollar weakens for the second consecutive month! Increased US Treasury repo raises policy concerns; Wall Street expects a further decline in September

According to Zhitong Finance APP, the US dollar weakened for the second consecutive month in August, as the US Treasury plans to accelerate government bond buybacks, sparking new concerns among overseas investors about US policy direction and reigniting market speculation that Trump administration policies may lean toward a weaker dollar. Meanwhile, despite recent hawkish comments from Federal Reserve Chairman Waller briefly boosting the dollar, there remains significant disagreement in the market over whether the Fed can deliver on the rate hike expectations currently priced in.

The Bloomberg Dollar Spot Index fell 0.9% in August, following a 1.3% drop in July, marking its second consecutive monthly decline. Of the first eight months this year, the index has fallen in five, and is now experiencing its longest monthly losing streak since February.

One critical reason for the dollar's pressure this month stems from US Treasury Secretary Beisent's more proactive debt management policy. Earlier this month, Beisent unexpectedly announced plans to expand government bond buyback operations, stating that the scale of a single Treasury buyback could exceed $400 million. This move has unsettled overseas investors and reignited market speculation that a series of US government policies may have a tendency to suppress the dollar.

In response, hedge funds, asset management firms, and other speculative investors have reduced their long positions on the dollar. On Monday, Beisent further stated that he is “aligned” with Federal Reserve Chairman Waller on the bond issue. This statement once again drew investor attention to the interplay between US fiscal and monetary policy.

Macro strategist Tatiana Darie noted that after Waller reaffirmed the Fed’s inflation objective last week, concerns over the credibility of Fed monetary policy have eased; however, Beisent’s latest statements remind investors that his more proactive market intervention policy style still poses another layer of risk for the dollar.

The dollar fell by about 0.2% on Monday, partially giving back Friday’s gains. On Friday, Waller pledged to bring US inflation back down to the Fed’s 2% target, prompting markets to raise their bets on further rate hikes. US inflation has exceeded the Fed’s 2% target for more than five years now.

Currently, traders estimate the probability of a Fed rate hike in September has surpassed 50%, and markets have also increased their bets on further monetary tightening this year.

Typically, rising rate hike expectations boost returns on dollar assets, thus supporting the dollar. However, some Wall Street institutions believe current market pricing for Fed rate hikes may be too aggressive.

Wells Fargo strategist Erik Nelson expects the dollar may weaken further in September, as the Fed is unlikely to deliver all the rate hikes the market has already priced in. If this proves true, as traders unwind previous rate hike bets, both Treasury yields and the dollar could face repricing pressure.

The dollar’s current trend is being shaped by two competing policy forces. On one hand, Waller has clearly reaffirmed the 2% inflation target and signaled willingness to further tighten monetary policy if necessary, boosting confidence in the Fed’s policy credibility and providing some support for the dollar.

On the other hand, Beisent’s expansion of Treasury buybacks and more active intervention in the bond market have led investors to worry the US government may want to suppress long-term financing costs and reignited speculation about weak-dollar policy.

As a result, even with warming rate hike expectations, the dollar has not gained sustained upward momentum. This policy divergence also makes the foreign exchange market more sensitive to US economic data. Especially as Waller is not inclined to provide the market with “forward guidance” on future rate paths, investors will have to rely more heavily on each piece of economic data to judge the Fed’s next move.

This week, the market will focus on Friday’s release of the latest US employment report, for more insight into the state of the US economy and labor market.

Bank of America FX strategist Alex Cohen said that August US economic data will be crucial. If employment and inflation data are weak, the Fed may maintain rates unchanged; but if the data beats expectations again, further rate hikes may become more urgent, while once again testing the Fed’s policy credibility.

As the market awaits new economic data, dollar volatility has begun to rise. Over the past two trading days, one-month implied volatility on the dollar index has ticked higher, showing that traders are preparing for potentially greater exchange rate swings in the coming weeks.

Overall, the dollar is currently caught between conflicting signals from fiscal and monetary policy. Beisent’s expansion of Treasury buybacks has revived fears that the US government may lean toward a weaker dollar, while Waller’s hawkish stance reinforces rate hike expectations and supports the dollar. With the dollar falling for the second consecutive month, whether upcoming US employment and inflation data will support current rate hike pricing will be a key factor in determining its performance in September.