USD rebound lacks conviction amid rising cross currents
USD’s recovery lacks conviction.
Group Research - Econs, Philip Wee25 Aug 2026
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The DXY Index recovered by 0.2% to 99 overnight, but conviction remains limited following last week’s 0.9% sell-off to a three-month low. Investors looked past the 2.4% decline in Brent crude prices to $92.17 per barrel, and the 4.5 bps decline in the US Treasury 30Y yield to 5.226%. Iran produced an unusual risk-off signal. Oil fell rather than rose after Washington expanded financial sanctions on Tehran and threatened secondary sanctions on countries continuing trade with Iran. The market appeared to sense a shift towards economic pressure potentially reducing the immediate risk of further military escalation. The S&P 500 and Nasdaq Composite Indices fell by 0.3% and 0.8%, respectively, ahead of key tech earnings results.

US bond market stress remains the bigger macro story. US long bond yields eased, following reports that the US Treasury Department could tap its estimated $1 trillion General Account to finance its expanded long-bond buybacks rather than issue additional bills. Gold and Bitcoin remain supported, reflecting the unease over the policy lines blurred by US Treasury Secretary Scott Bessent’s interventions and Fed Chairman Kevin Warsh’s push to end forward guidance. The focus of Warsh’s first Jackson Hole Speech on Friday will be more about the Fed’s reaction function and whether he can restore confidence in the Fed’s policy framework.

The CAD was the clear underperformer in the DXY basket, dropping 0.6% to 1.3845 per USD, after US President Donald Trump threatened a 50% tariff on Canadian cars, trucks, and auto parts from January 2027, following the collapse of bilateral trade talks. Canada plans retaliatory tariffs from September 8. That said, USD/CAD has a resistance around 1.39, which is the 50% Fibonacci retracement level of its two-month rally from 1.3550 to 1.4250 in May-June. USD/CAD also returned into the lower 1.35-1.39 range seen in the first five months of 2026. As for the other commodity currencies, NZD/USD faces resistance at the psychological 0.60 level after retracing most of June’s sell-off from 0.60 to 0.5625. The retracement was driven by stronger market pricing for a Reserve Bank of New Zealand rate hike (93% chance) compared to the Fed (43% chance) next month. Similarly, AUD faces resistance at 0.72 after retracing its sell-off to around 0.69 in June. While rate-hike expectations have receded for the Reserve Bank of Australia, AUD/USD remains the best-performing currency in 2026, holding within a higher 0.68-0.73 range with the highest G10 policy rate.

European currencies consolidated on Monday, with last week’s broad rally interrupted by a modest USD recovery. GBP remains the strongest of the pack, the only European currency to post YTD gains after the negative US nonfarm payrolls on August 7. UK GDP growth has picked up, while US growth has slowed. YoY CPI inflation also rose in the UK, while it has slowed in the US. GBP/USD is holding around 1.3650 or around May’s highs, with the year’s highest level slightly above 1.38 during the “Sell America” trade in late January. EUR/USD remains supported after recovering to around 1.17 from below 1.14 in the past four weeks. Against the strong expectations for a European Central Bank rate hike next month, EUR/USD will need further policy disappointment in the US to return to push above its end-2026 level of 1.1746 and turn positive for the year.

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     Galileo Galilei

August 25 in history
In 1609, Galileo Galilei demonstrated his revolutionary telescope to the Venetian senate, allowing lawmakers to see distant ships and landmarks as if they were close by. This powerful tool changed astronomy forever.







Philip Wee

Senior FX Strategist - G3 & Asia
philipwee@dbs.com

 

 
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