The dollar firmed on Tuesday as investors weighed Washington's expanded Iran sanctions against ongoing pressure on Treasury yields. The dollar index rose while the euro, sterling and Canadian dollar slipped, and Stanley Druckenmiller called the Treasury's bond-buyback plan a mistake that risks the market's credibility.
Dollar firms as Iran sanctions widen
The dollar regained some strength on Tuesday as traders parsed an expansion of U.S. sanctions against Iran unveiled by Treasury Secretary Scott Bessent on Monday, which warned countries to cut business ties with Tehran or risk being forced out of the dollar-based financial system. Iran vowed to retaliate, with officials telling local media they expected major trading partners to resist Washington's pressure.
Ray Attrill, head of FX strategy at National Australia Bank, said the sanctions risk is one likely driver behind the dollar's reversal after last week's weakness. As a result, the dollar index gained 0.1% to 99.07, extending an overnight rise of 0.16% and pulling away from three-month lows.
The euro slipped roughly 0.1% to $1.1655 for a third straight day of declines, while sterling eased from a six-month high to $1.3624 and the yen weakened to 159.32 per dollar. The Canadian dollar weakened 0.1% to $1.3860 after the United States threatened higher tariffs on Canadian goods once trade talks collapsed, while the New Zealand and Australian dollars held flat at $0.5955 and $0.7152.
Treasury eyes buybacks to calm yields
Treasuries found some support after CNBC reported the Treasury could tap part of its cash balance to buy back longer-dated bonds, building on Bessent's move last week to double the size of quarterly repurchases after yields hit their highest levels in nearly two decades. The plan would draw on roughly $940 billion held in the Treasury's General Account to fund purchases of 10- to 30-year debt, doubling quarterly buybacks to $4 billion per operation from September 10.
Even so, the relief proved limited: the 2-year Treasury yield held flat at 4.246% while the 10-year climbed back to 4.710%. Investors are now awaiting the July PCE price index, the Fed's preferred inflation gauge, due Wednesday. They are also watching Fed Chair Kevin Warsh's debut Jackson Hole speech on Friday for clues on policy direction.
Druckenmiller calls the buybacks a mistake
Billionaire investor Stanley Druckenmiller went further, arguing the buyback plan is eroding the Treasury market's credibility. In a Wall Street Journal opinion piece published Monday, he said markets were correct to view the doubling of long-end buyback lots to $4 billion as price management and a mistake. That view followed the 30-year Treasury yield's climb to a nearly 20-year high, which triggered a rally that soon reversed.
According to Druckenmiller's opinion piece: "These enlarged operations happen to run through the final stretch of a midterm campaign." Druckenmiller, who has worked alongside both Bessent and Warsh, said durably lower yields require addressing the primary deficit rather than intervening in bond markets.
Sources: Investing.com/Reuters, Investing.com, Investing.com/Reuters
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