The U.S. dollar entered a pivotal week trading against a backdrop of heightened fiscal and geopolitical risks, as market participants reassess the greenback’s safe-haven credentials amid uncertainty over Washington’s policy path.
Traditional drivers of dollar strength—such as escalating tensions with Iran, elevated oil prices, or renewed trade friction with China—are no longer providing clear directional signals. Instead, traders are increasingly focused on how new initiatives from Washington may influence inflation, fiscal deficits, and long-term Treasury yields. Scott Bessent’s proposed sanctions against Iran, described as the most extensive financial offensive in decades, could disrupt oil flows and tighten global supply chains. However, the immediate market reaction may be tempered by skepticism over Iran’s ability to enforce a Strait of Hormuz blockade, with oil prices starting the week lower despite the threats.
A more assertive sanctions package could initially boost crude prices and provide a geopolitical bid for the dollar. Yet the longer-term implications for the greenback remain uncertain. Higher oil prices risk stoking inflation expectations, pushing the 30-year Treasury yield higher and complicating the Federal Reserve’s policy stance. The dollar might gain in early trading, only to face selling pressure as the market refocuses on fiscal sustainability and currency debasement risks.
ING’s rates team anticipates bearish steepening in the Treasury curve, with the long end under pressure from expanding debt, persistent deficits, and corporate issuance tied to AI investments. The $44 billion seven-year Treasury auction on Thursday will serve as a key test of investor appetite. Bessent’s promised fiscal consolidation measures are viewed with skepticism, given the administration’s focus on growth-oriented policies, which may do little to ease bond market concerns.
Federal Reserve Governor Kevin Warsh faces a delicate task at Jackson Hole on Friday, tasked with signaling the central bank’s commitment to price stability without appearing to align with Treasury policy. If Warsh’s remarks fail to reassure markets, the 30-year yield could break above last week’s high of 5.34%, with ING warning it may approach 5% if fiscal risks and oil prices continue to rise. Such a move would invert the traditional relationship between yields and the dollar, as investors demand compensation for fiscal and inflation risks rather than seeking safe-haven assets.
The shift in sentiment is already evident in derivatives markets, with the one-month risk reversal favoring euro calls for the first time since February, signaling growing caution toward the dollar. While Europe faces its own fiscal challenges, the relative weakness in the greenback suggests the euro may benefit from the dollar’s struggles.
Elsewhere in G10 currencies, the Canadian dollar has weakened amid escalating U.S.-Canada trade tensions. Mark Carney’s pledge to retaliate “dollar for dollar” against tariffs has raised concerns over a prolonged dispute, though oil prices may provide some support if energy markets remain stable.
For the dollar, the week’s outcome hinges on the bond market’s reaction to policy developments. Unlike political announcements, long-term Treasury yields do not respond to staged applause, leaving the greenback’s direction dependent on fiscal credibility and inflation dynamics.
