The U.S. dollar began September with a pullback, erasing roughly half of the gains triggered by Federal Reserve Chair Kevin Warsh’s hawkish remarks delivered on Friday. The move initially suggested markets were beginning to discount the prospect of tighter monetary policy, but the rates market presents a more nuanced picture.
Two-year SOFR rates remain elevated above 4.20%, more than 10 basis points higher than levels observed prior to Warsh’s speech. Markets are pricing approximately 16 basis points of tightening for the September Federal Open Market Committee meeting and roughly 37 basis points by year-end. Despite this repricing, the dollar has weakened, creating a notable divergence in FX markets.
The front end of the U.S. Treasury curve continues to reflect a hawkish Fed stance, which typically supports the greenback by enhancing the relative attractiveness of dollar-denominated assets. However, attention has shifted toward the long end of the curve, where yields have risen alongside climbing oil prices following renewed hostilities between the U.S. and Iran. Rather than viewing higher long-term yields as a sign of stronger U.S. returns, FX markets appear to interpret the move through a fiscal lens, raising concerns over Treasury intervention and debt sustainability.
This dynamic introduces an unusual split in market signals. While the front end suggests the Fed may maintain a tighter policy stance supportive of the dollar, the back end introduces fiscal and Treasury management risks that weigh against the currency. For dollar bulls, this divergence underscores the need for caution, as the hawkish repricing has yet to fully unwind the fiscal-risk premium embedded in the greenback.
The trajectory of the dollar this week hinges on incoming U.S. economic data. Following Warsh’s remarks, markets would likely require a series of materially weaker releases to meaningfully alter expectations for the September FOMC meeting. The key tests include ISM Manufacturing and Services PMI data, ADP employment figures, nonfarm payrolls, and the unemployment rate.
The baseline outlook remains relatively resilient. ISM Manufacturing is expected to remain above 55, while services activity is projected to stabilize. ADP employment around 40,000 would be soft but not necessarily weak enough to derail the Fed debate, while payroll growth of approximately 65,000 would reinforce the view that the labor market is cooling rather than collapsing. A modest slowdown alone is unlikely to overturn Warsh’s hawkish signal. For the dollar correction to gain traction, multiple indicators would likely need to deteriorate in tandem, compelling a reassessment of September tightening expectations.
Technically, the U.S. Dollar Index (DXY) is trading near 99.60, having rebounded from August lows near 98.60 but failing to reclaim the psychologically significant 100.00 level. The 100.00–100.15 region has emerged as a key resistance zone following August’s breakdown. A decisive move above this area would indicate the post-Warsh repricing is gaining traction in FX markets and could pave the way for another leg higher in the dollar. For now, DXY remains below this threshold, leaving the currency in a precarious position where monetary policy expectations are supportive, but price action has yet to confirm them.
