USD downside risks as Washington hits USD sentiment again
The desk opines that recent developments in the US Treasury's bond buyback strategy are exerting downward pressure on USD sentiment, as highlighted in a discussion between MUFG's Derek Halpenny and Shan Husain. The statement notes that the USD has experienced a notable decline over the past four weeks, primarily influenced by policies that impact bond yields negatively. In light of this, the desk suggests that while the USD faces downside risks, geopolitical factors, including US-Iran tensions and rising energy prices, may offer a degree of support. Per the full note , the sentiment shift underscores a broader trend where Washington's policy trajectories directly affect currency valuation and investor confidence.
What the desk is arguing
The desk emphasizes the correlation between the US Treasury's bond buyback increment and its adverse impact on the US dollar, framing it as a critical factor compounding existing market pressures. This situation is evidenced by the USD's significant decline, the largest since notable interventions around Liberation Day last year, as referenced in recent discussions by MUFG.
The discussion indicates that while USD sentiment is under duress, external factors such as persistent geopolitical risks with Iran and the potential for increased energy costs could temper outright bearish moves on the dollar, thus presenting a nuanced view of the market.
Where it sits in our coverage
For the EUR/USD pair, our consensus target is 1.1634, with a range from 1.1200 to 1.2000 as various firms forecast different outcomes.
The desk's analysis appears to align with the broader consensus expecting modest USD weakness, but within the range provided, particularly toward the lower bound of the projection.
How other firms see it
Firms like goldman and jpmorgan forecast more aggressive targets for EUR/USD, indicating a stronger euro against the dollar as the market navigates these new policy changes. Conversely, firms such as bofa are more conservative, suggesting limits to the potential downside for USD.
Looking further, the anticipated movement in USD/JPY will likely reveal how these dollar trends interact with recent BOJ policy adjustments. Additionally, shifts in BoE policy will be critical for the GBP/USD trajectory.
How firms align with this view
consensus1.1634range1.1200–1.2000
Key takeaways
01USD sentiment is under pressure due to US Treasury's increased bond buyback, affecting investor confidence.
02Geopolitical factors like US-Iran tensions and rising energy prices could mitigate potential USD declines.
03Analysts have differing views on the impact of USD weakness, with targets suggesting a wide band of outcomes for EUR/USD.
Market implications
Traders should closely monitor the EUR/USD levels around 1.1700 for signs of a stronger euro, as well as geopolitical developments that could sway market sentiment. A shift in US bond yields will also be pivotal to observe in the coming weeks.
Risks to this view
A significant escalation in US-Iran relations or sudden shifts in US energy prices could reverse the current dollar sentiment and lead to a stronger USD, counteracting expectations of downside movement.
Welcome to the MUFG Global Markets FX Week Ahead podcast with Derek Halpenny, Head of Research Global Markets, EMEA and International Securities. It's Friday 21st August 2026 and joining Derek to pose some questions on the financial market themes for the week ahead is Shan Hussain in FIFX Sales. This material is only intended for professional investors in jurisdictions in which its use is permitted under applicable laws, rules and regulations.
It has been produced for information purposes only and should not be construed as investment research or advice. MUFG EMEA disclaimers and disclosures can be located on our website. Welcome Derek.
How are you? I'm good, Shan. It's Friday afternoon, so all is good when it's Friday afternoon.
And you? Yeah, totally agree. I'm fine.
Thanks very much. And welcome to our listeners as well. We've obviously had an event for a week with obviously the announcement of the USD bond buyback and the upcoming policy steps that are to be announced by Scott Besent.
So let's start with that and your thoughts on the U.S. needs and as well as, you know, the fears of another round of USD debasement, please. Yeah, I think obviously when you get the authorities trying to step in and influence market pricing, the markets very often are sceptical and become concerned about risks of credibility and failure. And in a way I can certainly understand this kind of theme that's coming back in terms of U.S. dollar debasement.
The dollar's bounced back a little bit now, but earlier today the dollar was down by the largest amount over a four-week period, which captures the week in which we had the supposed joint intervention. And it was a drop of nearly 3%, which was the biggest over that period since the period after Liberation Day 2025. And the common theme between those two periods, obviously, is it was instigated by U.S. dollar policy initiatives of some sort.
So it does kind of fuel that perception that there is this kind of underlying wish for the Trump administration to want a weaker dollar. And given their obsession with wanting trade deficits to shrink, it's obviously pretty consistent with one of the strongest ideological policies that the Trump administration has. So it's understandable in that sense.
Scott Besant needs to follow up by showing he's doing what basically he was lecturing Japan to do after the intervention that took place towards the end of July on CNBC a few days later, spoke about the signaling effect of intervention, but that ultimately for a turn to be sustained, it needs a policy change. So same thing applies in terms of concerns in Washington about rising yields needs to be addressed with policy. Now, markets are awaiting the policies that he implied were about to be announced yesterday, you know, to address fiscal concerns.
I'm skeptical, the markets are skeptical, that anything of any significance will be announced to address fiscal concerns. The Republican Party has a six-seat majority in the House. We have got the midterms in November.
Anyway, Trump himself is just not going to go down the road of anything in terms of notable fiscal consolidation. So we're probably going to get, you know, tinkering around the edges in terms of policy initiatives from Scott Besant, you know, agency spending freezes, federal hiring suspension, procurement reviews, tackling fraudulent activities, you know, elements like that that are low-hanging fruit to adopt, but will have pretty limited impact. So the markets are skeptical in terms of what the administration can do.
Of course, he can hint at further buybacks, he can hint at changes in funding in terms of the tenors. So there is more that they can do, but it's not going to address the fundamental issue in terms of the fiscal deficit. And in that sense, there's always a risk that we could see this unravel quite quickly.
And if yields go back up quickly, they've already retraced a good deal of the drop in terms of the 30-year yield. If yields go back further higher, it undermines the credibility of the administration. If yields are contained, the next lever in which is likely to be reflecting those manipulations would be FX.
And hence, there are a couple of different avenues in which we could still see the US dollar weakness on the back of this. No, thanks for that. What role, if any, did Warsh have with, you know, with what has unfolded this weekend?
And just to tie into that, is it possible to get a repeat of USD debasement selling as in January? And how are the Middle East risks maybe hampering that a little bit? Yeah, like I think Warsh, first of all, I would say Jackson Hole, which I guess in August, it always gets a lot of focus.
There tends to be not a lot going on. Jackson Hole is next week. I think after what's happened this week, Jackson Hole for Kevin Warsh is definitely a lot more important.
If you look at the most recent leg higher in long-term yields, it basically started after the FOMC meeting. We had a yield sell-off that day, and then it was reinforced by the intervention then, which the US joined. So in that sense, the FOMC has had a role in this, and of course, a larger term premium reflecting uncertainties about the Fed's reaction function is partly down to the strategy of Kevin Warsh himself in terms of not giving forward guidance like the Fed used to.
So come to next week, you know, does he just do the same and not give any clear indications in terms of forward guidance? The risk, of course, then is that we get a US Treasury sell-off and yields move higher, and there'll be finger pointing at Kevin Warsh, and perhaps Trump will start to get angry with his new chair at the Fed. Or he does give more clarity, but then he risks being viewed as being beholden to the US Treasury and the administration.
So he has a difficult kind of balancing act to try and achieve next week. And in that context, it'll be interesting to see how it plays out. But there is certainly a risk.
I'd be surprised if he was to change his strategic approach to communication very much. And that could kind of refuel the angst and result in further steepening of the curve. I think that's the most likely kind of scenario that we would view for next week.
And do you want to touch on the risks to monitor in the Middle East? Oh, sorry. Yes.
Yeah. You mentioned that. Yeah.
Like, again, if I agree generally that the risks have shifted because of this weekend, you know, there's certainly scope for further dollar selling. But as I mentioned a moment ago, the dollar weakness today has pretty much fully reversed. And I do think there will be an element containing a repetition of what happened in January.
January was just full on pretty negative dollar sentiment and high to low in the month of January, the dollar dropped by four percent. You know, if energy prices continue to move higher and we move into September, the Fed are going to be, you know, they're going to probably have to hike. Obviously, it depends to the scale of energy price rises, but it's going to be very difficult to avoid that.
You know, you can't keep talking about energy being a temporary factor if now Trump is talking about playing the long game and squeezing the Iranian economy. So with that in the background, the potential of crude up to $100 a barrel, that's going to push rates up. It's going to raise expectations of a rate hike.
And I think that is the key elements that could curtail the degree of dollar selling from here. Now, there is talk that there's more energy getting through the Strait of Hormuz, but I've read conflicting stories on that. The Trump administration are certainly trying to push the idea that they're in full control of the Strait of Hormuz and that more and more energy is getting out and that's helping to cap prices.
We'll see. But, you know, natural gas prices here in the UK and TTF in Europe have been grinding higher. We're now at, you know, new highs since the conflict began and that could become a kind of a negative macro theme, certainly in Europe, if those natural gas prices continue to move higher.
Yeah. Unfortunately, we're feeling the pinch here as well. What does all this mean for Japan and future intervention?
How will Japan fund USD sales? You've had a few bouts of intervention recently, one along with the Fed. So curious to see, you know, what they can do in the future.
Yeah. And again, you know, Scott Besant talking about Japan using the FEMA repo to swap treasuries rather than sell treasuries to raise dollar cash. Again, it looked a little bit desperate because it just doesn't make sense.
Why would Japan? Because obviously using the FEMA repo window, there's a charge. Why would Japan do that when they have basically a trillion dollars worth of U.S. assets and cash?
They've got about $170 billion of dollar cash. So, you know, now I admit maybe a deal was done there in terms of we'll support you with joint intervention, although it was barely joint intervention, but they certainly wanted to give the impression that it was joint intervention. And in return, you won't sell U.S. treasuries to finance intervention.
But you know, I think it would depend. There could be symbolic use by Japan using the repo window, but as a fundamental strategy over a sustained period, that just doesn't make sense. I don't think it would happen.
So the choices for Japan, if we were to go back up again, would be maybe to use cash initially, maybe some symbolic use of the FEMA repo. But you know, ultimately, they would ultimately end up, I'm sure, using sales of U.S. treasuries to generate the financing. And yeah, and you know, don't forget, it's a very profitable trade.
Between 1999 and 2011, yen selling intervention, dollar buying, was about 70 trillion yen worth. And obviously now this is all being reversed and that's locking in very healthy dollar yen profits. Indeed.
Just to round that off, we had Japan CPI data today. So your thoughts on that, plus the BOJ speech by, you know, next week by Deputy Governor Himeino. I think that everyone is maybe looking at the BOJ policy direction, and I think that's been one of the major factors in how yen has been under pressure recently.
Yeah, like the inflation data, it was pretty much in line expectations. Like we are now seeing a turnaround, inflation is picking up, and you know, the BOJ's forecasts indicate they are expecting this. So there's nothing new or surprising in the data, but it does obviously reinforce the expectations that are in the market that the BOJ should hike.
That pricing is at about 80% implied probability, and I would expect them to deliver, especially if the energy situation forces the Fed to move. The Fed is meeting a couple of days before, so they'll definitely act, if the Fed have acted. But I still think they'll act, you know, either way, but obviously there's a risk that they don't if the Fed don't, depending on what's happening in the background.
But priced at 80%, I think, you know, there's no reason why they shouldn't. The speech next week could be important, obviously Deputy Governor Himeino is one of the more senior members of the BOJ. So I would expect him to reinforce those expectations, and then, you know, getting closer to the meeting then with speeches from key members and effectively endorsing the pricing will certainly make it much more likely that they will deliver.
And, you know, I think from a JGP perspective, it's important, they need to get to a broader, more credible, neutral policy stance, and it's probably going to take 50 to 75 basis points more of tightening in order to get to that kind of neutral level that could be deemed as more appropriate. So definitely, there's a need to go. Yeah, we'll obviously keep an eye on that and everything else that happens next week.
Thanks very much, Derek, for your time today. Thanks, Shahan. Have a good weekend.
And you, and thank you to our listeners. Have a good one. Thank you.
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