The U.S. dollar opened the week on a softer footing as markets awaited policy updates from Washington, with traders citing potential fiscal consolidation plans and fresh sanctions on Iran as key risks.
The dollar index hovered near recent lows, with the analysis suggesting further consolidation in a 98.50-99.00 range on Monday. The analysis noted that most policy paths appeared to favor a weaker dollar, though a speech by former Federal Reserve governor Kevin Warsh on Friday could provide temporary support. The dollar’s direction remained contingent on developments in U.S. economic policy, including Treasury Secretary Scott Bessent’s announcement of new sanctions on Iran.
Trade tensions also weighed on sentiment, with the analysis highlighting the potential for renewed tariff escalations between the U.S. and China. China remains Iran’s largest buyer of energy imports, raising concerns that stricter sanctions could strain U.S.-China trade relations. The analysis described a scenario where a significant re-escalation in tariffs would likely be dollar-negative.
Attention turned to fiscal consolidation efforts, with the analysis noting that few expected substantial spending cuts or tax increases given Washington’s pro-growth stance. Instead, efficiency gains were seen as the likely focus. The U.S. Treasury market remained under scrutiny, with a $44 billion auction of seven-year Treasuries scheduled for Thursday adding to the week’s policy focus.
Key data releases included Wednesday’s U.S. inflation report for July and Warsh’s keynote speech on Friday. While the analysis did not expect Warsh to provide clarity on the Fed’s next policy move, it suggested his remarks could reinforce the central bank’s commitment to fighting inflation—a potential hawkish event risk for the dollar.
In Europe, the analysis cited positioning data from Chicago futures markets indicating asset managers and leveraged funds had increased long euro positions, though the increase was described as modest. The data predated last Wednesday’s sharp rise in EUR/USD, leaving speculators underweight the currency. The German IFO business climate survey for August, due Tuesday, was expected to show continued recovery from March and April’s declines.
The analysis maintained its forecasts for EUR/USD at 1.17 by the end of September and 1.18 by year-end, though it noted these targets would be reviewed in light of recent price action. Near-term support was seen around 1.1660/70, with a break below this level potentially opening risk of a sharper pullback if risk assets came under pressure.
In Canada, the analysis highlighted the breakdown in U.S.-Canada trade negotiations, with both sides re-imposing tariffs. Given Canada’s more open economy, the analysis suggested Prime Minister Mark Carney may introduce additional fiscal stimulus to support affected industries. After a strong recent run, the Canadian dollar faced some pressure, with the analysis indicating a potential correction toward the 1.3800-1.3910 area before USD sellers were expected to re-emerge.
