Newsletter · 2026-08-28 · Ashutosh Agarwal

Warsh's Jackson Hole Debut Becomes the Fork in the Road for Emerging Market Carry - EM FX Weekly - Week of August 28, 2026

EM FX weekly for the week of August 28, 2026. Podcast synthesis on why Kevin Warsh's first Jackson Hole speech is the hinge for the emerging-market carry trade, the hawkish tell that would put a floor under the dollar, and the reserve-diversification bid running through gold.

EM FX Weekly

Week of August 28, 2026: Warsh's Jackson Hole Debut Becomes the Fork in the Road for Emerging Market Carry

Every emerging-market currency trade this year has rested on one thing: a softening US dollar. So it matters enormously that this week the people who talk about money for a living spent their time on one man, Kevin Warsh, the new Federal Reserve chair, giving his first big speech at the Jackson Hole conference in Wyoming. That speech lands this weekend, and it is the fork in the road for the whole borrow-cheap-dollars, earn-fat-EM-yields carry trade.

The week's conversation sat one layer up from any single currency pair, on the question every EM book is levered to: does the US dollar keep sliding, or does Warsh put a floor under it?

TL;DR

The week was all about the run-up to Warsh's Jackson Hole debut. Reporters and economists say he is deliberately going quiet, killing "forward guidance" (the Fed's habit of telegraphing its next move), and markets are rattled less by what he says than by what he will not say.
Warsh sounds hawkish, and that is the risk to EM. He has insisted 2% inflation is the real target, three Fed officials wanted to raise rates in July, and a top monetary economist thinks the hawks are right. A Fed that is ready to hike is exactly what puts a floor under the dollar, and a ceiling on the EM carry trade.
The "sell America" chorus got louder, but it is coming from gold sellers rather than FX desks. Several shows hammered the same theme: central banks stepping back from US Treasuries, piling into gold, and a slow drift toward settling trade in yuan instead of dollars. A bullish backdrop for EM and gold, though it is pundit conviction rather than desk positioning.
Last week's dollar-sinking trick already faded. The US Treasury's bond-buyback move that knocked the dollar down a week ago got re-priced out within days, and yields crept back up, yet gold and Bitcoin kept ripping. US federal debt crossed $40 trillion this week.
The read-through runs through gold, oil, Treasuries and the broad dollar rather than through any single named currency pair.

What's new

Warsh's Jackson Hole debut is the event the whole EM trade hinges on, and the preview was unusually sharp. On What Fed Chair Kevin Warsh's Jackson Hole Debut Means for Nervous Markets (WSJ's Take On the Week, Aug 23), the Journal's chief economics correspondent Nick Timiraos and Columbia economist Frederick Mishkin, who actually served alongside Warsh at the Fed during his first stint, walked through what to expect.

The short version: Warsh is changing how the Fed talks, and Wall Street hates it. In plain English, "forward guidance" is the Fed telling markets what it is thinking and likely to do next. Warsh wants to do away with it. Timiraos put it bluntly: Warsh is "evasive by design. I don't mean that pejoratively." The problem, Timiraos said, is not just that Warsh will not promise a rate path, since most economists agree the Fed should not make promises. It is that he is 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. And by collapsing those two things into one, we're seeing some pretty unusual reactions... from so-called trigger pullers in the markets who are maybe more unsettled or confused, not by what he is saying, but by what he is not saying."

Why an EM investor should care: a confused, jumpy Treasury market is the opposite of the calm, low-volatility backdrop that carry trades need. When US bond yields lurch around, the borrow-dollars-buy-EM trade gets riskier, and money tends to run home.

Mishkin's worry cut the same way. He argued the thing that actually stabilizes markets is transparency about the Fed's reaction function, a fancy phrase for "if inflation does X, here's how we'll respond." Get that across, he said, and "the markets will do a lot of the work and heavy lifting for the Federal Reserve." His fear is that Warsh instead wants to channel the 1990s Alan Greenspan, cryptic, "just trust me, I'm the expert." One glimmer of hope Mishkin flagged: Warsh has put Mervyn King, the widely respected former Bank of England governor, in charge of the task force reviewing forward guidance, and King favors being open about the reaction function.

The hawkish tell is the real signal for EM. Buried in the same conversation is the part that matters most for anyone long EM carry. Warsh has been emphatic that 2% inflation is the target. "I want to disabuse people of this idea that we've accepted a little bit higher than 2 percent inflation," Timiraos quoted him as saying. Core inflation has run above 2% for more than five years, three Fed officials formally dissented in July because they wanted to raise rates, and there is a live argument that the AI boom is stoking fresh demand. Asked directly whether the hawks have it right and the Fed should be "on their front foot ready to raise rates," Mishkin answered: "Yeah, I would answer yes."

That is the whole ballgame for EM currencies. The bullish EM case all year has quietly assumed the Fed drifts dovish and the dollar keeps leaking lower. A Warsh Fed that is genuinely willing to hike into sticky inflation is the scenario that stops the dollar's slide and takes the shine off the carry trade. Mishkin even flagged the political overhang: Warsh was appointed by a president who wants lower rates, and "if he pisses off Trump... Trump is going to go after him like gangbusters." A chair caught between a hawkish read of inflation and a boss demanding cuts is a recipe for exactly the kind of communication mess Timiraos described.

The "the dollar system is cracking" camp got louder, from the gold desk rather than the FX desk. Several shows this week made versions of the same argument, and it is worth taking seriously as a backdrop even though it comes wrapped in a sales pitch, since these are largely gold dealers talking their book.

On Gold Becomes the "New Money" As Bonds Blow Up, China To Control Price (ITM Trading Podcast, Aug 21), Matthew Piepenburg of Von Greyerz laid out the reserve-diversification story with specific numbers. Central banks, he said, now hold more gold than US Treasuries; the pace of central-bank gold buying in 2026 is "the highest on record"; and the effort accelerated after the dollar was "weaponized" against Russia in 2022, a roughly 5x jump in official gold accumulation. On China specifically: the People's Bank has bought gold for a 20th straight month, imported 700 tons in the first five months of this year, and 14,000 tons since 2015. He also flagged a genuinely new plumbing development, with China setting up a physical-gold settlement and clearinghouse in Hong Kong (announced June, live in July) to price gold off physical delivery rather than Western paper futures. His FX-relevant point: gold is quietly becoming "the new trusted trade settlement asset," a slow bleed away from the dollar's monopoly.

Piepenburg also tied it to the funding-side stress flagged last week. The Japanese carry trade, he argued, is "devastating" US Treasuries, with Japan selling more Treasuries in the first half of this year than in the prior five years combined, and US hedge funds dumping Treasuries too as they buy back yen. He pinned the US at $40 trillion of public debt with $8 trillion needing to be refinanced in the next 12 months at higher rates, and interest costs around $3 billion a day. His kicker on the dollar's odd behavior: "Warsh hasn't even raised rates. The 10-year has gone up more than 80 basis points without the Fed having to do anything. And the DXY is at, what, 99 and 100?"

The same debasement theme ran through Only A Gold Standard Can Stop The Currency Collapse (The Flying Frisby, Aug 23), where longtime gold analyst Alasdair Macleod argued fiat currencies are heading toward collapse unless they re-anchor to gold. The parts relevant to EM and reserves: China has been trimming its US Treasury holdings since around 2014 while stacking gold "as have most countries along the Silk Road," though it still sits on more than $3 trillion of dollar reserves. "They are trying to get out of the dollar as quickly as they can... without rocking the boat." He noted the PBoC quietly told Chinese banks earlier this year not to hold too many US Treasuries, and that Japan's finance ministry has leaned on pension funds to buy domestic assets, which means selling foreign, dollar assets. He also pointed to French government bond yields "soaring recently" as European institutions liquidate, a reminder the strain is not only a US story.

The geopolitics-of-the-dollar case, spelled out. On Two Wars: One You Can See. One You Can't. (The Jay Martin Show, Aug 21), host Jay Martin connected the oil story to the bond story to the dollar story. Foreigners hold roughly $9.4 trillion of US Treasuries, Japan $1.2 trillion and the UK $895 billion, and, he argued, energy-short countries have been selling them to raise dollars for oil, dragging foreign Treasury holdings at the New York Fed to their lowest since 2012. His "line in the sand" for the whole system: whenever the 10-year Treasury yield creeps toward 4.4%, the cost of servicing $36 trillion of US debt starts to spiral. His most EM-relevant point is about the yuan: with the Strait of Hormuz disrupted, he says ships are already paying passage "in Chinese yuan and cryptocurrency," a French-owned vessel transited "likely paying in yuan," and Deutsche Bank has published a note calling the Iran conflict a potential catalyst for a "petro-yuan." The war framing is a pundit painting a dramatic picture, but the underlying trend it points at, trade slowly settling in non-dollar terms, is the real long-run EM tailwind.

The debate

The bull case for EM (a soft dollar keeps giving) was argued this week by the gold camp rather than by any FX strategist. Their version: the world's central banks are quietly walking away from the dollar and into gold, the US is drowning in $40 trillion of debt it can only service by keeping money loose, and every attempt to prop up the bond market is really just more debasement. In that world, the dollar keeps leaking lower and everything priced against it, gold and by extension high-yielding EM currencies, grinds higher. It is a real backdrop. But notice who is making it: gold dealers rather than currency desks. That does not make it wrong, though it does mean the conviction on offer is directional rather than positional.

The bear and caution case (the dollar finds its floor at Jackson Hole) is the one with the sharper near-term teeth, and it comes straight out of the Warsh preview. If Warsh confirms a Fed that takes 2% inflation seriously and is willing to hike, with three officials already wanting to, core inflation sticky above target for five years, and Mishkin siding with the hawks, then the dollar stops falling. That is the single scenario that ends the EM carry party, and it could be delivered this weekend. The debasement bulls are implicitly betting Warsh blinks or muddles it; the caution case is betting he does not.

Read-throughs

With the week playing out at the macro level, the connections run through assets rather than currency pairs:

Gold is the cleanest expression of everything above and it is behaving like it, ripping to fresh strength on central-bank buying, the new China physical-settlement venue, and the debasement bid. If you believe the reserve-diversification story, gold is the vehicle the pods are actually pointing at, and it reads through to gold-heavy EM exposures.
US Treasuries and the dollar are the hinge. Watch the 10-year yield: Jay Martin's 4.4% "pain line" and the general nervousness around $40 trillion of debt tell you the Treasury and the Fed are boxed in. A calmer bond market is good for EM carry; a jumpy one, courtesy of Warsh going quiet, is not.
Oil and the yuan travel together in this week's narrative. Strait-of-Hormuz disruption keeps a bid under crude, and the more oil trades outside the dollar, the more the "petro-yuan" drift becomes a slow structural negative for the greenback, and a slow positive for EM's non-dollar future.
Bitcoin got pulled into the same distrust-of-governments trade, up roughly 15% on the week (from the low-$60,000s to about $72,000, per The Canadian Investor). Treat it as a sentiment gauge for the debasement theme more than an EM signal.
EUR/USD and Europe: Macleod's flag on soaring French government bond yields is a reminder that if you are getting out of dollars, the euro is not a clean safe harbor either, with France and Germany both carrying their own fiscal problems. That keeps the euro anchor for Central Europe's currencies wobbly.

What changed

The one concrete shift from last week: the Treasury's dollar-sinking bond buyback already lost its punch. A week ago, the big story was the US Treasury doubling its purchases of older ("off-the-run") Treasury bonds, which flattened yields and knocked the dollar down right before Jackson Hole. This week, Trade Deal Hopes, Consumer Weakness, and Bond Market Jitters Send Gold & Bitcoin Higher (The Canadian Investor, Aug 22) walked through the aftermath: yields dropped on the announcement day (the 30-year from about 5.33% to 5.18%, the 10-year easing too), but "now it's creeping back up" as the market shrugged and decided Washington will just keep borrowing. Gold kept ripping even as yields rebounded, a tell, the hosts argued, that this is a confidence problem rather than a yield problem, with the real (after-inflation) 10-year yield still a healthy 2.4%. They also flagged Bessent floating the FIMA repo facility (a way for foreign central banks to raise dollars against Treasuries without selling them) as "essentially stealth QE," and noted US debt crossed $40 trillion this week.

The takeaway for EM: last week's dollar dip that gave carry a lift was partly a one-off intervention effect, and it is fading. Which is exactly why this weekend's Warsh speech matters so much, since it will decide whether the dollar's slide resumes on its own or finds a floor.