Dollar Faces Uncertainty as Policy Credibility Takes Center Stage

The US dollar closed August with only a modest loss, ending the month at 99.428 after trading between 98.800 and 100.014. Despite this, the dollar's performance was weighed down by concerns over US policy credibility, particularly Treasury actions that raised questions about the country's fiscal stance.

Fed Chair Kevin Warsh's hawkish speech at Jackson Hole helped the dollar recover towards the end of the month, but his message also reaffirmed the Fed's commitment to its 2% inflation goal. This drove yields higher, with the two-year rate ending August at 4.344% and the 10-year at 4.752%. However, the dollar did not fully follow the rise in US yields, as investors remained focused on policy credibility rather than rate differentials alone.

The outlook for September is uncertain, with policy premium continuing to influence the dollar's price discovery. Further weakness may require clearer evidence of financial repression or a sharp deterioration in US data. The renewed conflict around the Strait of Hormuz adds another layer of uncertainty, as US strikes and Iran's response lifted oil prices and disrupted shipping.