The dollar fell for two consecutive months as the U.S. Treasury's buyback program forced out speculative bulls, and Warsh's hawkish stance only yielded a one-day rebound.

The dollar continued its decline in August, marking its second consecutive monthly drop, amid a mix of signals from the Federal Reserve reiterating its commitment to combating inflation and the U.S. Treasury accelerating its bond buyback program.

In August, U.S. Treasury Secretary Bessant unexpectedly announced an expansion of the Treasury bond repurchase program, shocking overseas investors and reigniting market speculation that U.S. policy was intended to weaken the dollar.

Hedge funds, asset managers, and other speculators subsequently reduced their bullish dollar positions. On Monday, Bessant also publicly stated that he and Federal Reserve Chairman Warsh were "in sync" on bond issues.

These signals suppressed the dollar's rebound momentum. Although Warsh's pledge on Friday to restore the US inflation rate to the 2% target boosted the dollar's gains, the dollar fell 0.2% on Monday; the Bloomberg Dollar Spot Index fell 0.9% in August, continuing the 1.3% decline in July.

Traders have increased their bets on a Federal Reserve rate hike this year, with the market pricing in a September rate hike at over 50%. However, Wells Fargo strategist Erik Nelson warned that if the Fed fails to deliver on its priced-in rate hikes, the dollar's weakness could continue into September.

US Treasury buybacks trigger long position liquidation; interventionism dominates dollar pricing.

The Bloomberg Dollar Spot Index fell 0.9% in August, extending its 1.3% decline in July. It has recorded declines in five of the first eight months of the year, marking its longest losing streak since February.

The core catalyst for the downturn came from the U.S. Treasury's debt management operations. Earlier this month, Bessant announced an expansion of its government bond buyback program, shocking overseas investors and reigniting speculation that U.S. policy was aimed at weakening the currency.

Markets Live macro strategist Tatiana Darie noted that Warsh's reaffirmation of the inflation target eased market concerns about the credibility of monetary policy, but Bessant's latest remarks reminded investors that his interventionist approach is bringing another dimension of policy risk to the dollar.

Hawkish comments temporarily halt the decline, while expectations for interest rate hikes rise.

Warsh's hawkish comments on inflation targets last week briefly boosted the dollar and prompted the market to reprice interest rate hikes. Traders are now betting on a greater than 50% probability of a Fed rate hike in September.

Wells Fargo strategist Erik Nelson believes this pricing strategy may not be sustainable. He stated:

The Federal Reserve may not deliver on its already priced-in rate hike expectations in September, and the dollar is expected to weaken in September.

It is worth noting that Warsh has consistently disliked forward guidance, meaning that every economic data point could become a trigger for market repricing, and the one-month implied volatility of the US dollar index has risen significantly in the past two trading days.

With policy signals intertwined, non-farm payroll data becomes a key variable.

With policy signals from the Federal Reserve and the Treasury Department intertwined, the market's sensitivity to macroeconomic data is rising sharply.

This week's focus shifts to Friday's US non-farm payrolls report. Given Warsh's apparent aversion to forward guidance, every upcoming data point is all the more significant and could act as a market catalyst.

Bank of America foreign exchange strategist Alex Cohen said that the U.S. August data will be key. Weak employment and inflation could restrain interest rate hikes, but any upside surprises would present the Federal Reserve with another major credibility test.

Friday's non-farm payroll report will be the first key moment to test the future trend of the US dollar.

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