Newsletter · 2026-08-25 · Ashutosh Agarwal

The Treasury Buyback Sinks the Dollar and Lifts Emerging Market Carry - EM FX Weekly - Week of August 25, 2026

EM FX weekly for the week of August 25, 2026. Podcast synthesis on how the Treasury buyback softened the dollar and lifted emerging-market carry, why the professionals' risk shifted to the funding currencies, and the return of the Mexican peso to the tape.

EM FX Weekly

Week of August 25, 2026: The Treasury Buyback Sinks the Dollar and Lifts Emerging Market Carry

Last week the whole EM crowd was staring at one date on the calendar: Jackson Hole, August 28, and Kevin Warsh's debut as Fed chair. That was supposed to be the coin flip that settled whether the dollar's slide was over.

Then the Treasury front-ran it. On Wednesday the government doubled the size of its long-end bond buybacks, the long end of the Treasury curve flattened in a hurry, and the dollar dropped, before Warsh has said a word. For an emerging-market book, a softer dollar is a tailwind, and the carry trade got a lift. But the most interesting thing this week isn't the dollar level. It's where the professionals moved their worry. For months the nagging question about carry was "can the high-yielding stuff, the EM bonds, the frontier debt, survive an endless grind higher in US long yields?" This week, in the space of one afternoon, the fear jumped to the other end of the trade: the cheap currencies everyone borrows to fund it. That's a subtle shift, and it matters.

Oh, and after weeks of silence, a real country story came back to the pods: the Mexican peso.

TL;DR

The US Treasury doubled its long-end bond buybacks (to as much as $4 billion per issue, "and it could be more"), flattening the long end and knocking the dollar lower. J.P. Morgan's FX team calls it a "reasonably small episode" in size but a genuine dollar-negative, and now says it is "thoughtfully neutral" on the dollar after being bullish since mid-May.
The carry-trade risk conversation flipped from the asset side (can EM/frontier debt handle rising yields?) to the funding side (are the Swiss franc and yen, the currencies everyone borrows, about to squeeze?).
Treasury Secretary Scott Bessent, in his first interview since the move, leaned on "asymmetric information," promised more tools, and teased a fiscal-consolidation push. St. Louis Fed's Alberto Musalem said he'd have voted to hike in July, underlying inflation is running 2.5–3%.
The peso is back in the conversation: Banxico looks done cutting and would sit on its hands even if the Fed hikes; Governor Victoria Rodríguez says Mexico "hasn't won the battle against inflation." The swing factors are the USMCA extension talks (4th round in September) and a fiscal picture the rating agencies are watching.
Preferred plumbing this week (from J.P. Morgan's FX desk): like carry via Aussie and Norway's krone, funded out of Swiss franc and Swedish krona; the EM team still likes the Colombian peso.
Cross-currents: Brent near $89–94 with a live path to $100–120 if the Iran standoff escalates, and a US–China tariff truce that's holding only because Washington needs China's rare earths. Xi Jinping is due in Washington on September 24.

What's new

The Treasury sank the dollar, and J.P. Morgan's FX desk went from dollar bull to "thoughtfully neutral." The single most useful EM discussion of the week was on J.P. Morgan's At Any Rate, "Global FX: Debate Corner 2.0" (August 21), with host Arindam Sandilea and strategists Meera Chandan, Patrick Locke and James Nelligan. Their framing of the week: "Reports of a quiet summer for macro markets are greatly exaggerated." One week it was the historic joint intervention on the yen; this week "it was the turn of the Treasury to up the size of long-end bond buybacks that abruptly flattened the long end of the US yield curve and sank the dollar." Their verdict on Bessent: "an activist Treasury that is not gun-shy about making the most of the tools at its disposal."

Here's why it matters for anyone running EM. The desk splits the dollar's drop into two stories. One is mechanical and familiar: when the Treasury buys back long bonds it pulls down "term premium" (the extra yield investors demand for lending long), which eases financial conditions, lifts risk assets, and softens the dollar, good for carry. The second is squishier and more dangerous: a whiff of "policy unpredictability" creeping into US decision-making, "not too dissimilar to" the "Sell America" and "dollar debasement" trades that peaked in 2025. Their honest take on how big a deal this is: "Valuations are cheap. The positions are still somewhat long, though may not be as long as CFTC data suggests." Translation: nobody's sure how much extra risk premium to slap on the dollar here.

Crucially, they think the whole narrative "crumbles" if US data comes in as their own economists expect and the Fed "acts conventionally… shallow hikes into the end of this year and beyond." That was their thesis for turning bullish the dollar back in mid-May, higher US rates make the dollar a decent carry currency in its own right. So they're not chasing the dollar lower. As one put it, they're "thoughtfully neutral… watchfully thinking about the dollar." And they keep the buyback in perspective: it's "like 14 billion effectively in the buybacks this quarter compared to the 32 trillion dollar treasury market," and even the yen intervention was tiny, Treasury sold "maybe around a half a billion euro-yen." When Washington has "dipped its toe in recently, it hasn't been in a shocking bazooka style size."

The stress-testing of the carry theme has moved. Before the buyback, clients pressed on the asset side, could EM and equities survive rising long yields. Right after, "the stress testing went to the other side, the financing side."

That last point is the fresh insight of the week. The vulnerable spot in the carry trade is now widely thought to be the funding legs, the Swiss franc and the yen, "where everyone and their mother is funded out of Swiss franc for their carry trades." A resurgent debasement/gold bid, or another surprise yen intervention, could squeeze those shorts and force a scramble. J.P. Morgan's answer is that the backdrop is still "quite conducive to carry", strong global PMIs, a real growth story, so they'd rather fund out of the Swiss franc and the Swedish krona against high-beta, energy-exporting currencies than back away.

Bessent's own words: "asymmetric information," a "big toolkit," and a fiscal push coming. For the primary source on the catalyst, the Squawk on the Street exclusives on August 20 are worth your time, first Treasury Secretary Scott Bessent, then St. Louis Fed President Alberto Musalem. Bessent said the buyback is a signal that the long end is "a thinly traded area of the market" distorted by heavy corporate issuance, and that "the yields don't reflect the underlying fundamentals." He was blunt that there's more where that came from: "It could be more than the $4 billion per issue… we have a big toolkit." He waved off the $40 trillion debt ("there's nothing magic about the $40 trillion number… we can grow our way out of that"), argued 2025 was actually a year of fiscal consolidation at "about 5.7 percent of GDP," and teased "an increased focus on fiscal consolidation" to be announced within days. Asked whether the joint yen intervention was risky, he leaned on a phrase he clearly likes: "I have asymmetric information… why would we have joined the Japanese in the intervention at this time? Do we know something the market doesn't know?" On whether all this boxes in the new Fed chair, he was dismissive: rate decisions have "nothing to do with the decision that I announced this week on the buybacks."

The other half of that interview is the reason the dollar bears shouldn't get comfortable. Musalem said flatly he would have voted to raise rates at the July meeting, because real policy rates are "below where the committee believes the neutral long run rate ought to be" and financial conditions are "pretty accommodative." His inflation read: strip out the supply shocks and "underlying inflation… is running between 2.5% and 3%, which is too high," and it needs to be back at 2% within 18 months. He also made the structural case that the "neutral" rate itself is drifting higher thanks to the AI capex boom and "very meaningful competition for capital." His preference: "earlier, more gradual interest rate increases are preferable… than later, potentially larger, potentially more abrupt increases." That is exactly the "shallow hikes" path J.P. Morgan's FX desk says would eventually put a floor back under the dollar, the built-in ceiling on how far this EM-friendly move can run.

The peso comes back to the pods. After weeks where no single EM currency got a proper airing, Mexico got two. On MexMoves (August 20), a J.P. Morgan economist walked through Banxico and the peso. The upshot: the central bank looks finished cutting. Governor Victoria Rodríguez, who led a dovish board to cut earlier this year over the objections of hawks like board member Jonathan Heath, said over the weekend that Mexico "hasn't won the battle against inflation." With headline inflation seen drifting back up toward 3.8–3.9% by year-end and growth weak (the May activity proxy was negative), the guest's base case is no more cuts, and, tellingly, no hikes either, even if the Fed goes: Banxico "moved ahead of the Fed" both hiking and cutting, "closed the door earlier," and is comfortable sitting still. He flagged the peso itself as "a very important thermometer" for what Banxico does next, and noted Mexico is less hostage to foreign bond flows than in past cycles, foreigners hold far less local debt than during the 2014 wobble.

The watch-item is fiscal, not monetary. Public-sector debt is running near 55% of GDP versus an earlier ~51% target, and folding Pemex and CFE back onto the sovereign's books makes the math harder, the guest noted both Moody's and S&P "made the right noises" back in May about the fiscal trajectory. To stabilize the debt, Mexico needs to grow "above 1.5%, between 2% and 2.5% at least," and right now it isn't. That, plus the trade file, is what could turn the peso.

USMCA: no renewal, but "the only game in town" is an interim deal. On 35 West (August 20), trade analyst Jaime Roy Martínez laid out where the USMCA fight actually stands. The pact was not renewed at the July 1 review, a "heavy blow", but it stays fully in force (all obligations still apply, with annual reviews running out to 2036 before it could lapse). His most-likely path is a transitional interim agreement in which Mexico offers fresh concessions, tightening rules of origin, "stronger measures against Chinese imports or Chinese investment in Mexico", in exchange for relief on the Section 232 tariffs (steel, aluminum, autos) and a promise against new ones. The catch is timing and politics: the fourth round of talks is in September, but US midterms in November and Mexican midterms in 2027 make everyone reluctant to sign. His warning is that the damage is quiet but real, companies are "enduring the pain," eating tariffs and thinner profits rather than passing them on, and that "the longer it takes, the more painful it will become." He also flagged a date to circle: Xi Jinping visits Washington on September 24, and China will be "front and center" of the USMCA endgame.

The debate

This week the pods gave you both sides cleanly, a rare treat.

The bull case for EM carry is straightforward and got the most airtime: the dollar just took another leg down on the Treasury's buyback, US long real yields (the single biggest driver of EM currencies this cycle) have come off, and the global growth backdrop, strong PMIs across developed markets, supports the high-beta, higher-yielding end of the currency spectrum. J.P. Morgan's FX desk isn't just tolerating carry, it's leaning in, funding out of the Swiss franc and Swedish krona. On the peso specifically, a Banxico that's done cutting keeps Mexico's rate advantage intact.

The bear case came, usefully, from inside the same conversations. First, the funding-side squeeze: the very fact that "everyone and their mother" is short the Swiss franc and yen to fund carry means a debasement scare, a gold spike, or another yen intervention could force a violent unwind, and this week the stress-testing moved precisely to that side of the trade. Second, and more fundamental, is the Musalem point: if US "underlying inflation" really is stuck at 2.5–3% and the Fed delivers the "shallow hikes" J.P. Morgan expects, the dollar gets its yield support back and this whole EM-friendly move stalls. J.P. Morgan effectively concedes the point by refusing to chase the dollar lower, they went neutral, not bearish. That's the tell: the pros think the dollar's slide is real but shallow, and that the bigger risk to carry now sits in the currencies you borrow, not the ones you buy.

The named-country bear angles the toolkit usually worries about, a yuan test past 7.30, a rupee at 95, election-and-fiscal risk in Brazil or South Africa, lira fatigue, simply weren't voiced on the pods this week. The one country-specific caution that did surface is Mexico's fiscal drift and the USMCA overhang, covered above.

The trades in play

The episodes were unusually concrete this week, so here's the actionable read, woven from what the strategists actually said:

The carry expression, developed-market version. J.P. Morgan's FX desk likes being long the Australian dollar and the Norwegian krone, funded out of the Swiss franc and the Swedish krona. Their logic on the funders: the Riksbank is pushing back on rate-hike pricing with core inflation "well below 1%," and Sweden is an energy importer, so the krona should stay soft; the franc is rich (they peg euro-Swiss fair value around 92.50) but they'd rather short it against high-beta, energy-exporting currencies than against the euro. On Norway, they note a possible Norges Bank hike in September and energy prices working in the krone's favor.
The EM sleeve. Their EM team still likes the Colombian peso, which screens well on their systematic models, an energy-exporter carry play consistent with the broader "like high-beta, like carry" stance.
The funder to watch, not fund. The Canadian dollar is "less bearish" than it was, Canada looks headed for materially lower tariffs, so its appeal as a pure short is fading, though it still works as a funding leg for long-EM-carry trades. Positioning is a wrinkle: the market is still long dollars and very short CAD, which can short-circuit the usual "sell CAD as a dollar proxy" move.
The Mexican peso. A Banxico that's done cutting keeps the peso's carry intact; the September USMCA round and the fiscal/rating-agency watch are the two things that could break it either way. This is a "clip the carry but keep a stop on the headlines" trade, not a conviction long.
The hedge against the whole thing. If you're long carry, the cheapest insurance this week is on the funding side, the risk of a Swiss franc or yen squeeze around Jackson Hole (August 28), the September Bank of Japan meeting, or any fresh intervention, rather than on the EM assets themselves.

Read-throughs

Local-currency EM debt and EMB: the combination the At Any Rate desk keeps flagging, softer dollar plus easing US long real yields, is the friendly setup for EM local bonds and the dollar-debt complex. The offset is that US long yields are being managed lower by intervention, not by a genuinely dovish Fed; Musalem's hawkishness is the reminder that the yield tailwind could reverse.
Mexico equities (EWW) and the peso: both now hinge on the USMCA interim-deal path and the fiscal/investment-grade question more than on Banxico. A September round that produces tariff relief would be the clean positive; a stalemate that drags toward the US midterms is the risk.
Oil as a cross-current: on Wealthion (August 18), independent macro analyst David Woo, still long oil, sketched Brent near $89 with a live path to "$100, $120" if Iran leans on the Houthis to hit Red Sea tankers again, or if Washington starts fining Chinese banks and refineries for buying Iranian crude. Bessent himself noted Brent "back to 94." Higher oil cuts both ways in EM: a tailwind for exporters (the energy-exporting, high-beta currencies J.P. Morgan favors) and a headache for importers like India and much of Asia. Woo also flagged the louder "sell the dollar, buy gold" sentiment tied to the Iran standoff, the same debasement thread the FX desk is wary of.
China and the yuan: no dedicated yuan or PBoC-fix call on the pods this week, but on Bloomberg Businessweek (August 18), China Beige Book's Shahzad Qazi argued the US–China tariff truce is holding mostly because Washington is "wholly dependent" on Chinese rare earths and magnets, "we don't have a choice." With Xi due in Washington on September 24, the trade backdrop that shapes both the yuan and the USMCA talks is a live September story even if the currency itself stayed quiet.
The dollar regime itself: the mechanism this week was fiscal, not monetary. On Marketplace (August 19), Brookings' Robin Brooks argued the dollar is falling because markets are trading a "debasement" narrative around fiscal dysfunction, and that Warsh shouldn't wave it away at Jackson Hole given the tail risk of a currency-depreciation spiral. That is the bull-case-for-EM and the bear-case-for-the-world rolled into one: a weaker dollar helps the carry trade right up until it becomes disorderly.

What changed

Jackson Hole got front-run. Last week the market was waiting on Warsh (August 28) to settle whether the dollar's slide was done. This week the Treasury pre-empted it, doubling buybacks and knocking the dollar lower before the Fed said a word, so Jackson Hole is now a test of whether Warsh validates or fights the easier conditions Bessent just engineered, not the opening act.
The carry fault line moved. For weeks the worry was whether EM and frontier assets could withstand rising US long yields. After the buyback, the professionals' worry jumped to the funding side, the Swiss franc and yen shorts that finance the whole trade. New risk, same trade.
A country story finally returned. The Mexican peso and Banxico got real coverage for the first time in weeks, with a clear message (done cutting, on hold even if the Fed hikes) and clear swing factors (USMCA, fiscal). The other named threads, yuan, rupee, won, real, rand, lira, CE3, stayed off the pods.
J.P. Morgan's FX desk changed its posture, not its trades. After turning dollar-bullish in mid-May on the "Fed reaction function," the desk this week went "thoughtfully neutral" on the dollar, while keeping the carry book (long Aussie/Norway, short franc/krona, like the Colombian peso) intact.