The U.S. dollar edged lower on Tuesday as investors weighed fresh sanctions on Iran and the Treasury’s decision to double quarterly bond buybacks, while expectations for a Federal Reserve rate hike in September softened.
The U.S. Dollar Index fell 0.07% to 98.92, with the euro gaining 0.09% to $1.1673. The British pound strengthened 0.1% to $1.3644, while the Japanese yen weakened 0.06% to 159.22 per dollar. Bitcoin rose 0.43% to $79,259.06 after briefly touching a three-month high of $81,237.94 earlier in the session.
U.S. Treasury Secretary Scott Bessent announced the expansion of sanctions against Iran on Monday, warning that countries continuing to do business with Tehran risk exclusion from the dollar-based financial system. The measures, which omitted major trade partners like China, drew a defiant response from Iranian officials. Analysts noted the sanctions lacked detail, limiting their immediate market impact.
The Treasury also disclosed plans to double the size of quarterly repurchases of longer-dated bonds, a move aimed at reducing borrowing costs. A CNBC report suggested the department may use part of its cash balance to fund the buybacks, though no specific amounts were disclosed. The announcement followed a period of heightened volatility in U.S. Treasuries, with benchmark yields fluctuating amid shifting expectations for Fed policy.
Federal Reserve rate hike expectations for the September meeting have declined, with CME FedWatch pricing in a 40.1% chance of at least a 25-basis-point increase, down from roughly 55% a month prior. The shift reflects growing market skepticism about the Fed’s willingness to tighten policy amid mixed economic signals. Fed Chairman Kevin Warsh is scheduled to deliver remarks at the Jackson Hole economic symposium on Friday, an event that could further influence rate expectations.
Geopolitical tensions extended beyond Iran, as trade relations between the U.S. and Canada deteriorated. The U.S. confirmed a 50% tariff on all Canadian cars, trucks, automotive parts, and steel starting January 1, 2027, following the collapse of trade talks. Canada responded with retaliatory tariffs on approximately $20 billion of U.S. imports and pledged support for affected businesses and workers. Goldman Sachs analysts described the measures as relatively measured, suggesting businesses had already adapted supply chains in anticipation of prolonged trade friction.
UBS economists trimmed Canada’s 2026 growth forecast to 0.9% from 1%, citing the escalating trade dispute as a key drag on economic activity. The Canadian dollar strengthened 0.1% to C$1.383 per dollar, recovering from Monday’s sharp decline, which marked its largest single-day drop since June 17.
Market strategists highlighted conflicting forces shaping the dollar’s trajectory. Marc Chandler, chief market strategist at Bannockburn Capital Markets, noted that while fundamentals and central bank policy expectations weighed on the greenback, technical indicators suggested the currency was oversold. “The dollar is overstretched, the momentum indicators are oversold for the dollar,” Chandler said. “So to me, that’s the tension that you’ve got: dollar oversold technicals and bearish fundamentals.”
