Newsletter · · Ashutosh Agarwal

The Dollar Cannot Decide After the Treasury Buyback and a Failed Yen Rescue - G10 FX Weekly - Week of August 24, 2026

G10 FX weekly for the week of August 24, 2026. Podcast synthesis on an activist Treasury capping its own yields, a dollar that snapped back, a yen that leaked past the biggest rescue in years, and why Jackson Hole now sets the direction.

G10 FX Weekly

Week of August 24, 2026: The Dollar Cannot Decide After the Treasury Buyback and a Failed Yen Rescue

Last Monday the story was simple: the dollar was cracking, the euro was pushing toward its one-year high, and the Swiss franc was at a fresh peak. Ten days on, the picture is messier and more interesting, because Washington did something it almost never does, the US Treasury started buying back its own long-dated bonds to force borrowing costs lower.

That single decision, announced on August 19, dominated everything the currency world talked about this week. It briefly knocked the dollar down another notch, sent the franc lurching, and lit a fire under gold and Bitcoin. Then, just as quickly, the dollar snapped most of the way back. The euro is at about $1.17, the pound near $1.36, and the franc has slipped off its high, with the dollar now buying about CHF 0.80 again.

And the yen? After the biggest currency rescue in a generation, it has quietly leaked all the way back. The dollar buys about ¥159, right where it was before the drama, and weaker than a week ago.

So the week gave us a genuinely new tool from an "activist" Treasury, a giant question mark over what the new Fed chair will say at his first Jackson Hole, and a yen that keeps proving it cannot be rescued by force. Let's get into it.

TL;DR

  • The Treasury blinked. On August 19, Secretary Scott Bessent doubled the size of the government's bond buybacks, the Treasury literally buying its own 10-to-30-year debt to push those yields down. Luke Gromen's verdict on Monetary Matters: people say "it looks like he panicked. I said, 'He should be panicking.'"

  • It's small, but the signal is huge. JPMorgan's FX team on At Any Rate size the buybacks at "14 billion… compared to the… $32 trillion Treasury market." Tiny. But it tells the market the government will now step in to cap its own borrowing costs, a move markets read as quietly inflationary and dollar-negative.

  • The dollar's reaction says it all. The moment long-term yields fell on the news, the dollar sank and gold and Bitcoin soared, the classic "debasement" trade. Then it reversed. As Brookings' Robin Brooks put it on Marketplace, this was "financial engineering… shuffling the deck chairs," not a fix.

  • The franc, not the yen, jumped the most. Saxo's John Hardy on the Saxo Market Call: "It was the Swiss franc that reacted the most… a question of positioning," because so many traders now borrow francs to fund other bets.

  • Jackson Hole is still the main event. New Fed chair Kevin Warsh gives his debut speech, and the whole market is desperate to hear his "reaction function", plain English: what would actually make him move rates, and in which direction. He has so far refused to say.

  • The yen can't be saved by intervention alone. Even after roughly $90bn spent in late July, the dollar is back to ¥159. A Bank of Japan rate rise in September now looks near-certain (at least a quarter-point), but several guests argue Japan is now "past the event horizon" where rate gaps even matter.

  • Carry still pays. JPMorgan's clean summary: "We like carry. We like the likes of Australia and Norway. We like funding them out of currencies like Swiss and the Swedish krona."

What's new

1. The Treasury started buying its own bonds, and that changes the game

Here is the development that reframed the week. For months, the pressure point in markets has been the long end of the US bond market, the interest rate the government pays to borrow for 30 years. That rate had climbed to around 5.3%, near its highest in two decades, as investors balked at the sheer volume of debt Washington needs to sell.

On August 19, the Treasury responded. It roughly doubled the size of its "buybacks", operations where the government goes into the market and buys back its own longer-dated bonds. Because bond prices and yields move in opposite directions, buying the bonds pushes their price up and their yield down. In effect, the Treasury is now leaning on its own borrowing costs.

The sharpest walk-through came from Luke Gromen of Forest for the Trees Research on Monetary Matters (Aug 20). He was blunt about why:

People are saying, "Oh, it looks like he panicked." I said, "He should be panicking."

Gromen's framing is that this is not a one-off, it's the latest step in a long march toward what economists call yield curve control: a central authority actively managing long-term interest rates instead of letting the market set them. He calls the buyback "a version of… Operation Twist… another soft form of yield curve control," and warns the trade-off "is going to be inflationary." His reasoning is a debt-math problem that no amount of clever engineering escapes: the government's mandatory spending (pensions, health care, interest, veterans) already eats up more than the entire tax take and is growing far faster than revenue. "The math," he says, "is the math."

Why it matters: an "activist" Treasury willing to cap its own yields is a slow, structural negative for the dollar, because it signals the authorities would rather tolerate a weaker currency and higher inflation than let borrowing costs run free. JPMorgan's team on At Any Rate (Aug 21) opened their podcast with the perfect epitaph for the summer: "Reports of a quiet summer for macro markets are greatly exaggerated." They noted Bessent even "alluded to the idea that there are other unused tools in the Treasury toolkit still", so more surprises may be coming.

2. …but it's a tiny move, and the dollar snapped back

Here's the twist that keeps this from being a clean, one-way story. The buyback is minuscule relative to the market it's trying to move. JPMorgan put hard numbers on it: the operation is worth roughly "14 billion… compared to the… $32 trillion Treasury market." A drop in the ocean.

So the market's first reaction, dollar down, gold and Bitcoin up, faded fast. Robin Brooks, senior fellow at the Brookings Institution (and a former chief currency strategist), on Marketplace (Aug 19), dismissed it as cosmetic:

I would call it financial engineering. It is really shuffling the deck chairs.

His point: the real problem is a budget deficit running near 7% of the economy in a year with no war or pandemic to blame. A bond buyback doesn't touch that. And the price the Treasury paid was ugly, the 30-year yield fell only from about 5.3% to 5.2%, "but the dollar is tumbling. This is not a good tradeoff." He added the warning that hangs over this whole exercise: yes, the Treasury likes a soft dollar, but "you don't want it to tumble because that's bad for reserve currency status," and Japan is the "warning sign" of what happens when you fiddle with your own yields and your currency spirals.

That is why, by this Monday, the dollar had clawed back most of its losses: the euro is back below $1.17, the franc has eased to around CHF 0.80, and the yen is weaker, not stronger. The buyback made a splash and then the tide went back out.

3. Jackson Hole: the market wants a "reaction function," and Warsh won't give one

The single biggest event on the calendar is the annual central-bankers' gathering in Jackson Hole and, at its center, the debut speech from new Fed chair Kevin Warsh. This is not the usual "will they hike or cut" debate. It's about how the Fed talks to markets at all.

Warsh wants to scrap "forward guidance", the practice of telling markets in advance what the Fed is likely to do. And so far, as the Wall Street Journal's chief economics correspondent Nick Timiraos explained on WSJ's Take On the Week (Aug 23), it's unsettling everyone:

He's evasive by design. I don't mean that pejoratively.

The problem, Timiraos says, isn't that Warsh won't pre-commit to a rate path, most economists agree he shouldn't. It's that he's also declining to explain how he reads the economy at all: "explaining how you read the economy isn't the same thing as promising what you'll do about it." By refusing both, he's left traders guessing.

His guest, Columbia professor and former Fed official Frederick Mishkin, drew the crucial distinction. Markets don't need promises; they need to understand the Fed's reaction function, the simple if-then of how it will respond as inflation or unemployment change:

If you get the markets and the public to understand your reaction function… the markets will do a lot of the work and heavy lifting for the Federal Reserve.

Mishkin's worry is that Warsh wants to revive the "cryptic communication, sort of just trust me, I'm the expert" style of Alan Greenspan. One hopeful sign: Warsh has handed the whole guidance question to a task force led by former Bank of England governor Mervyn King, who is a firm believer in being transparent about that reaction function.

Why it matters: every currency in this letter is, right now, a bet on that speech. JPMorgan's Kay Herr, on Bloomberg Surveillance (Aug 18), said plainly that if Warsh finally adds "some clarity to the reaction function, I think, can help calm the market down." A relaxed, dovish Warsh keeps the weak-dollar story alive; a Warsh who signals he wants to defend the Fed's credibility on inflation hands the dollar straight back its yield advantage.

4. The hawkish counter-current: some think the Fed gets dragged into a hike

Underneath the dovish, weak-dollar consensus, a genuine backlash is building. The argument is that the bond market and the gold market are losing patience with a Fed that only talks tough.

Chris Temple of The National Investor, on The KE Report (Aug 22), thinks Warsh should stop dithering: "If you need to raise rates… you do it, you shore up the bond market, you get the bond market vigilantes back on the sideline." His read on gold is the tell, it's up around 14% this month and the gold-miner shares roughly 40%, and it's now rising despite high bond yields and rising energy costs, both of which used to push it down. In his words, gold is "calling Warsh's bluff": the market suspects Warsh will keep talking about beating inflation and never actually do it. Temple calls the odds of an actual rate hike at the September 16 meeting "a coin toss," and warns that if the Fed doesn't move, gold will blow past its early-2026 high "before Christmas."

That view has company. BMO's chief currency strategist Mark McCormick, also on Bloomberg Surveillance, argues inflation's deeper drivers, "industrialization, electrification, fiscal dominance, energy policy, even geopolitics… these are all inflationary", aren't going away, and that financial conditions have actually eased even as yields rose: "the Fed is not tightening. They're actually… adding more fuel to the fire."

Why it matters: the entire weak-dollar move rests on the belief that the Fed is parked. If the next US jobs and inflation prints run hot, or if Warsh sounds hawkish, a September hike snaps back onto the table, and the dollar with it.

5. Japan: the rescue that won't stick

Now to the currency that ties the whole letter together. Japan and the US mounted a historic joint effort to rescue the yen in late July, spending roughly $90bn. It hasn't held. The dollar is back to about ¥159, and the euro buys about ¥186 again.

The most vivid explanation came from Roberto Rios, speaking with host Mark Moss on Market Disruptors (Aug 19), in an episode bluntly titled "Japan is Breaking the Global Financial System." His core insight is a nasty feedback loop most people miss: when Japan intervenes to prop up the yen, it sells US Treasury bonds to raise the dollars it needs. That selling pushes US long-term yields up, which makes the very carry trade driving the yen down more profitable. It is, he says, "like pouring fuel on the fire." And the numbers back him up: after the $90bn July intervention, "in 10 days it's already retraced half of the move."

Rios's deeper point is that Japan is trapped. Its government debt is so enormous that it cannot raise interest rates enough to defend the currency without blowing up its own budget, and the new prime minister, Sanae Takaichi, "a populist right-winger who wants to increase government spending and… cut the consumption tax," is pushing the fiscal picture the wrong way. His conclusion is stark: the yen is now weakening "regardless even of… interest rate differentials… past the event horizon of even that mattering."

The one thing that could still change the story is a Bank of Japan rate rise, and that now looks close to certain. Economist Robert Murphy, on InFi: the Future of Finance (Aug 21), noted markets expect the Bank to "almost certainly raise at least 25 basis points when the BOJ meets in September." But he framed the bigger picture the way the bears do: "It's not good when the authorities have to spend $85 billion over two days to keep your currency from further weakening." Japanese long-term bond yields have already climbed from near zero to about 2.7%, and with government debt over 200% of the economy, every extra bit of yield is a fiscal headache.

Why it matters: the yen has become a pure test of follow-through. If Tokyo hikes in September and convinces the world it will keep going, the fundamentals finally start turning its way. If it hesitates, the dollar drifts back toward the intervention zone, and the whole cycle repeats.

6. The franc: the currency everyone borrows

The Swiss franc had the most violent single-day move of the week, and the reason is revealing. When the Treasury news first hit and the dollar dropped, Saxo's John Hardy on the Saxo Market Call (Aug 20) noted:

It was the Swiss franc that reacted the most… a question of positioning.

That positioning is the key theme. As JPMorgan's James Nelligan explained on At Any Rate, "everyone and their mother is funded out of Swiss franc for their carry trades", meaning traders borrow cheap francs to buy higher-yielding currencies elsewhere. When the dollar wobbles, all those trades get squeezed at once, and the franc jumps.

The genuinely new wrinkle: after the buyback, JPMorgan says clients suddenly started worrying about the funding side of the carry trade rather than the assets it buys, specifically "Swiss and yen and their vulnerability to this kind of unconventional action. Watch this space." For now, JPMorgan stays bearish the franc against faster-growing, energy-exporting currencies, pegging fair value for the euro against the franc a touch below today's level. But the underlying pull is clear: as long as the world needs a cheap currency to borrow, and the yen keeps threatening intervention, the franc keeps getting used, which is why it grinds to new highs even with no story of its own.

7. The pound: a new government, an old problem

Sterling finally got some domestic attention this week, courtesy of UK economist Simon French on NAB Morning Call (Aug 21). His picture is one of a decent economy hemmed in by a difficult budget.

The good news: UK inflation in July was 2.9%, still nearly a point above the Bank of England's 2% target and set to rise a bit further, and the economy was the fastest-growing in the G7 in the first half. So the Bank is comfortable staying on hold at 3.75%, and won't move before the big budget on October 28.

The bad news is that budget. The new prime minister, Andy Burnham, and his chancellor, John Healey, are "promising the world", more defence spending (from about 2.6% of the economy toward 3.5%), fixing social care, and lifting the frozen income tax threshold, and, French says flatly, they cannot do all that and stay "fiscally conservative" without spooking markets.

But French pushed back hard on the "Britain is about to have a debt crisis" narrative. "The UK hasn't got a funding problem," he insisted. It sold 10-year debt this week at 5.15%, the highest in almost 20 years, yet the auction was "3.5 times covered." Plenty of buyers; they just want to be paid for two decades of sticky inflation. The subtler pressure showed up in Saxo's Hardy, who noted the euro pushing up against sterling into resistance, adding that "this honeymoon period for Burnham seems to be in the rearview mirror." In short: no crisis, but no fresh reason to love the pound either. It remains, for now, a passenger to the dollar.

The debate

For once the two sides are evenly matched, and the fulcrum is Jackson Hole.

The weak-dollar case. An activist Treasury is now capping its own yields, the deficit is out of control, and the market is trading "debasement and fiscal dysfunction" (Brooks), gold and Bitcoin ripping is the proof. Every step the authorities have taken lately, JPMorgan notes, is "either… neutral to dollar negative." If the next US data softens and the Fed stays parked, the euro heads back toward $1.20 and the franc to new highs.

The strong-dollar / it-won't-last case. The buyback is trivially small, and the dollar already erased its losses. The Fed is not easing, pricing still shows shallow hikes ahead, "basically… about 35, 37 basis points" of tightening next year (JPMorgan), and a hot jobs or inflation print could revive a September hike (Temple, McCormick). JPMorgan's honest self-assessment: "We are thoughtfully neutral… watchfully thinking about the dollar." And on the yen, the bears remain in control, nothing this week gave the currency a lasting reason to rally.

The honest read: this is a real two-way fight, and it gets settled by one speech and two data points. The weak-dollar camp has the better long-term story; the strong-dollar camp has this week's price action and the arithmetic of a Fed that isn't actually cutting. Jackson Hole, then the next US jobs and inflation numbers, then the September meetings in Washington and Tokyo, that's the sequence that decides it.

Trades in play

  • Carry is the cleanest expression on the board. JPMorgan's summary is the trade: "We like the likes of Australia and Norway. We like funding them out of currencies like Swiss and the Swedish krona." Long the Australian dollar and Norwegian krone (both helped by firm energy prices and possible Norwegian rate hikes), funded by borrowing the franc and the krona. Their conviction on shorting the krona as a funder actually rose this week, the Riksbank keeps pushing back on rate-hike bets with core inflation "well below 1%."

  • The euro is a pure dollar bet. At $1.17 it sits just below its one-year high, but there's no fresh European story driving it, it lives or dies on the Fed. A dovish Warsh sends it toward $1.20; a hawkish one sends it back toward the low $1.13s.

  • The yen is a bet on the Bank of Japan, not the Treasury. Own it only if you believe Tokyo hikes in September and keeps going. Fade it if you think, as several guests do, that Japan is "past the event horizon" where rate gaps matter and intervention just buys time.

  • The franc is quietly everyone's funding currency. That's a slow, mechanical source of demand that keeps pushing it higher even without a domestic catalyst, but it's also a crowded, stretched short-the-franc-through-carry trade that can snap violently if the dollar tumbles again.

  • Jackson Hole is the real position. More than any single pair, Warsh's speech sets the dollar's direction. Size around the event, not into it.

Read-throughs

  • Gold and Bitcoin are voting for the debasement world. Gold near $4,500 (Temple, Hardy) and Bitcoin "coming alive" (Hardy) is the clearest cross-asset signal that markets expect the authorities to keep easing, intervening, and inflating. When a government starts buying its own bonds to cap yields, hard assets pay attention.

  • Japan and Western bond markets are joined at the hip. The feedback loop Rios described, Japanese intervention means selling US Treasuries, which lifts US yields, which fuels the carry trade, means Tokyo's currency defense is quietly pushing up borrowing costs everywhere. Watch Japanese long-term yields (now ~2.7%): the day the world believes the Bank of Japan is serious, the flow of Japanese savings back home becomes a genuine, sustained drain on US and European bond markets.

  • The euro-franc and euro-yen crosses are the carry barometers. Euro-yen running back above ¥186 and the euro grinding against a rich franc both say the same thing: the carry trade is alive, and the funders (franc, yen) keep getting sold until something breaks.

  • The carry unwind is the low-probability, high-damage risk. JPMorgan flagged that after the buyback, clients stopped worrying about whether high-yielders could withstand rising US yields and started worrying about the funders, the franc and yen, snapping back. A sudden yen or franc surge would force a scramble out of leveraged carry bets worldwide. It's not the base case; it's the accident to keep one eye on.

What changed

A week ago, the dollar was cracking cleanly and the euro was knocking on $1.20. Two things shifted.

First, the US Treasury changed its own toolkit. By doubling its bond buybacks, Washington signaled it will now actively lean on its borrowing costs rather than let the market set them. It's a small operation with a large message, and it pushed the whole conversation toward "fiscal dominance", the idea that the government's financing needs, not the Fed's inflation target, increasingly drive policy. The dollar's first instinct was to fall; its second was to recover. Both reactions were informative.

Second, the dollar's one-way weakness has become a genuine two-way fight. The euro, pound and franc have all handed back a little of last week's gains, and the yen has leaked all the way back to ¥159 despite the biggest rescue in years. The clean "sell the dollar" trade of last week is now hostage to a single speech and the next round of US data.

So the calendar hands off, once again, to the dates that tower over everything: Jackson Hole, where Kevin Warsh either feeds or starves the weak-dollar trade, the September 16 Fed meeting, where a hawkish surprise is no longer unthinkable, and the September Bank of Japan meeting, the real verdict on whether the yen's rescue was a turning point or a very expensive month. The euro is near its highs and the franc keeps grinding up, but both are borrowing their strength from a bet on what a few central bankers do next.