Dollar rebounds slightly with Iran sanctions, Treasury yields in focus

The dollar rallied by its largest margin in two weeks as the United States dramatically expanded secondary sanctions against Iran. Treasury Secretary Scott Bessent's pledge to isolate Iran from the global financial system revived safe-haven demand, driving broad dollar strength against major currencies.

In New York trading on the 24th (local time), the dollar index against six major currencies rose 0.17% to 98.99. The Bloomberg Dollar Spot Index also gained about 0.2%, strengthening against all G10 currencies.

Bessent announced an expansion of secondary sanctions targeting countries or entities that maintain business relationships with Iran. The move is aimed at severing all of Iran's economic lifelines, warning that any country trading with Iran would also face U.S. sanctions.

Andrew Hazlett, a foreign exchange trader at Monex, said, "The U.S. has sent a clear message that it will cut off Iran and its allies from the dollar system, reasserting the dollar's dominant position in global trade. Uncertainty over how far the sanctions will extend is also fueling safe-haven demand."

The dollar's rebound partially reversed the weakening trend that followed the Treasury Department's announcement last week of expanded long-term Treasury buybacks. The Treasury had said it would double the size of its buyback operations to support long-end liquidity. Combined with U.S. fiscal outlook concerns and political uncertainty, funds had shifted toward alternative assets like gold instead of the dollar, but the Iran sanctions announcement helped recoup those losses.

However, CNBC reported, citing two senior Treasury officials, that Bessent may tap approximately $1 trillion (about 1,382.8 trillion won) from the Treasury General Account (TGA) to fund bond buybacks instead of issuing short-term bills. The dollar briefly pared its gains and long-term Treasury yields fell on the news.

Brian Jacobsen, chief economist at Annex Wealth Management, said, "If reports that the Treasury will use its General Account at the Fed to buy long-term bonds are true, it could be an interesting experiment. Will firing a bazooka at a hurricane be effective?" He added, "Lower long-term rates won't solve the debt problem and could actually worsen it over the long run."

Some analysts remain cautious about whether the dollar's rebound is sustainable. Luis Oganes, head of global macro research at JPMorgan, maintained a neutral stance, saying he is not chasing further dollar downside at current levels. He noted that the possibility of future Federal Reserve rate hikes could support the dollar.

The same day, President Donald Trump announced that tariffs on Canadian autos, trucks, auto parts, and steel would rise to 50% starting January 1, 2027. The Canadian government pledged to retaliate dollar-for-dollar against the new tariffs.

The Canadian dollar fell 0.61% against the U.S. dollar to 1.385 per dollar, its largest drop since June 17 and snapping a three-day winning streak.

Canadian Prime Minister Mark Carney said a "mutually beneficial agreement" with the United States is possible, but only if the U.S. respects Canada's sovereignty.

Among major currencies, the euro fell 0.14% to $1.1663, while the British pound slipped 0.06% to $1.3632, holding near its six-month high of $1.3675 reached on the 22nd. The Japanese yen weakened 0.13% to 159.13 per dollar.

In cryptocurrency markets, Bitcoin rose 2.05% to $78,993.42. Bitcoin posted its largest weekly gain in about three and a half years last week.

This week, the U.S. will release key economic indicators including the Personal Consumption Expenditures (PCE) price index, personal income and spending, consumer confidence, and the preliminary estimate of second-quarter GDP.

Market participants are watching for any signals on the rate outlook from Fed Chair Kevin Warsh at the Jackson Hole symposium in Wyoming on the 28th. However, UBS economists expect Warsh to avoid any mention of the policy rate direction, noting he has been "attempting to eliminate all forms of forward guidance." Michael Gapen, chief U.S. economist at Morgan Stanley, also said he "expects silence on the near-term monetary policy outlook, including the expansion of the Treasury buyback program."

Long-term yields are under upward pressure globally due to a combination of solid economic growth expectations, rising inflation expectations, and concerns over mounting national debt. The Treasury's buyback expansion is a measure aimed at easing this upward pressure on rates, but concerns have also been raised that it could ultimately lead to dollar weakness.

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