The greenback’s trajectory looks bleak in August after stumbling badly at the end of July. The confluence of a Fed seemingly reluctant to hike, coordinated US-Japan currency interventions, and a cooling geopolitical landscape in the Middle East keeps the USD vulnerable.
First, Fed Chairman Kevin Warsh has unsettled investors who had amassed long USD positions betting on his hawkish credentials. Instead of signalling that rates may rise, Warsh used the July 28-29 FOMC meeting to focus on institutional reforms, especially scaling back forward guidance. The three dissenting Fed officials who voted for a 25-bps hike warned that waiting too long could ultimately require larger and more disruptive tightening in the future,
Rather than reinforcing the USD, the resulting steepening in the US Treasury yield curve reflected fading confidence in US monetary policy. Markets interpreted Warsh’s comments as an attempt to shift the burden of fighting inflation onto tighter financial conditions while sidestepping the market’s demand for higher rates. His reform agenda offered a convenient counterbalance to President Donald Trump’s desire for lower rates ahead of the November midterm elections.
Second, Washington appears willing to coordinate with Tokyo to pull the JPY from the abyss. USD/JPY tumbled below 158 after failing to break above 164 last week, fuelled by reports of coordinated interventions in late July. The move was far larger than the drop from 161 to 156 triggered by Tokyo’s unilateral interventions in late April. Evidence of US involvement has continued to build on. On July 31, Reuters photographed Treasury Secretary Scott Bessent’s handwritten note referencing “Buy JPY $5-10 billion.”. The same day, the Financial Times reported that the New York Fed sold euros to purchase yen. Beyond supporting an important ally, Washington has little incentive to tolerate a JPY at four-decade lows, which undermines the “America First” trade agenda. Coordinated intervention also reduces the need for Japan to fund interventions through Treasury sales, limiting unwanted additional pressure on the US bond market.
Third, President Donald Trump’s decision to cancel planned attacks on Iran appeared aimed at containing another oil price spike via military escalation. Brent crude surged 23.6% in July to around $90 per barrel, lifting average US gasoline prices by about 7%. Tehran’s threat to target countries hosting US military bases revived fears that oil could spike back into the $100-200 range. The political backdrop has become increasingly uncomfortable for the White House. US economic momentum is no longer exceptional, with 2Q26 GDP growth slipping below 2% and monthly nonfarm payroll gains falling below 100K. Against that backdrop, a renewed rise in fuel costs risks further eroding household purchasing power and weighing on President Trump’s already low approval ratings just months before the midterm elections.
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Malcolm Forbes
August 3 in history
The pedestal of the Statue of Liberty reopened in 2004 after being closed since the September 11, 2001, attacks.
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