Newsletter · · Ashutosh Agarwal

Warsh Gave the Dollar a Floor and EM Carry Blinked - EM FX Weekly - Week of September 4, 2026

EM FX Weekly for the week of September 4, 2026: Warsh's hawkish Jackson Hole speech moved September hike odds from 30 percent to two thirds, MUFG now targets a dollar index of 100, and TD Securities laid out which emerging-market longs survive a world where the dollar has a floor under it.

EM FX Weekly

Week of September 4, 2026: Warsh Gave the Dollar a Floor and EM Carry Blinked

Two weeks ago the whole emerging-market carry trade was parked on one question: what would new Fed Chair Kevin Warsh say at Jackson Hole? He has now said it, the podcasts have digested it, and the verdict is not what the carry bulls were hoping for. Warsh came out hawkish, the dollar stopped falling, and for the first time in months the year-long "soft dollar lifts everything in EM" story is on the back foot.

Here's the twist, though, and it's the interesting bit. The trade didn't die. It mutated. The action this week is all about how people are funding carry and which EM currencies still make the cut in a world where the dollar has a floor under it. One institutional FX desk laid out exactly which longs it still likes and which it's backing away from. That's where the money is.

TL;DR

  • Warsh's Jackson Hole speech was emphatically hawkish. He recommitted to a 2% inflation target he called "a firm, fixed target," said interest rates are the Fed's number-one tool, and brushed off soft wage data. Markets moved the odds of a September rate hike from roughly 30% to about two-thirds.
  • The dollar rallied and found a floor. MUFG sees the dollar index grinding up to 100. That removes the single biggest tailwind EM carry had all year, a falling dollar.
  • The carry trade is rotating, not dying. With the Bank of Japan set to hike and yen shorts at a three-decade extreme, TD Securities expects the funding side to shift out of the yen and into the Canadian dollar and Swiss franc.
  • The EM longs that survive are the commodity-backed ones. TD Securities still likes the South African rand ("more room," gold-supported), is wary of a "crowded" Mexican peso, and would buy the Brazilian real, but only after Brazil's election headline risk passes.
  • Global bond yields are the real story underneath it all. The US 10-year hit 4.8%, Japan's 10-year touched 3% for the first time since 1996, and that global yield surge is what's actually setting the tone for every currency.
  • Gold got hit. It sliced below its 200-day average and fell 3% to 4% as the hawkish Fed repriced rates higher, a clean read-through for gold-linked EM currencies.
  • The counter-case is alive: one closely-followed independent analyst argues the hawkishness is mostly rhetoric and inflation is about to roll over, which would hand carry back its dollar tailwind by year-end.

What's new

The single biggest development: Warsh delivered a hawkish speech, and the market believed him.

On The Economics Show (Aug 29), the Financial Times' Soumaya Keynes asked Torsten Slok, chief economist at Apollo Global Management, which runs about $1 trillion, to rate the speech's importance on a scale of one to ten. His answer: "The answer is 10. This was really, really important."

Why it matters for EM: Slok's read was that Warsh deliberately shifted the Fed's weight toward fighting inflation and away from protecting jobs, with inflation running at 3.5% versus the 2% target. Crucially, Warsh settled a live debate by naming his weapon:

"He made very clear that the number one tool for solving any inflation problem is interest rates, not tighter financial conditions and not the balance sheet." Torsten Slok, Chief Economist, Apollo Global Management

The market reaction was immediate. As Slok put it, "he pulled forward" the expected hike, from December to September. A Fed that hikes is a Fed that supports the dollar, and a supported dollar is a headwind for every high-yield EM currency that had been riding the dollar's decline.

The numbers behind the repricing. On LPL Research's Market Signals (Sept 1), Chief Fixed Income Strategist Lawrence Gillum and Chief Economist Jeffrey Roach walked through the move:

  • Going into the speech, markets priced about a 30% chance of a September hike. Afterward it jumped above 50%, settling near 67%.
  • Roach's own call on whether the Fed actually hikes on September 16: "It's a coin flip."
  • Markets have now "priced in a full rate hike by the end of this year and a 50% chance of a second rate hike this year."
  • The dollar "rallied again against a number of major currencies, including the yen as well as the Canadian dollar."

Gillum's framing was that Warsh, after two "uninspiring" press conferences, "redeemed himself somewhat, at least in the eyes of the fixed income market." Translation: the Fed just got its credibility back, and a credible inflation-fighting Fed is bad for the cheap-money conditions carry trades feed on.

The desk with the actual dollar target. The MUFG Global Markets Podcast (Aug 28) is where Derek Halpenny, MUFG's Head of Research for EMEA, put a number on it. He pointed out how low the bar had been, the market priced just "eight to nine basis points" for a September hike before Warsh spoke, and flagged the phrase that spooked everyone:

"We have work to do if inflation not moving to 2% with speed... and I think it's the 'with speed' that may kind of spook the markets." Derek Halpenny, Head of Research for EMEA, MUFG

His dollar call: the dollar index "can certainly grind up to the 100 level." Just as important, Halpenny argued the "dollar debasement" trade, the idea that a weakening, less-trusted dollar keeps falling, tends to be "quite fleeting, especially if rates go up." With US real yields rising and the debasement story looking more like an AI-driven capital-demand story than a fiscal-panic story, he doesn't see the recipe for "a sustained dollar depreciation." That's a direct challenge to the core bull thesis for EM carry.

Gold as the tell. On Saxo Market Call (Aug 31), Saxo's John J. Hardy titled his episode "Warsh spoils the gold party" for a reason. The two-year Treasury yield jumped, September hike odds moved to around 60%, and gold "sliced all the way back down through that 200-day moving average," trading below $4,500 and briefly under $4,400. Money Metals' Weekly Market Wrap (Sept 2) noted gold and silver fell 3% to 4% in the aftermath. Since a chunk of EM (the rand especially) trades as a gold proxy, a sharp gold pullback matters directly for the currency baskets.

The trades in play

This week actually gave us a proper roadmap, courtesy of one FX desk that named names.

On Bloomberg Surveillance (Sept 3), Jati Badwaj of TD Securities laid out how the carry trade is reorganizing itself, and this is the most actionable thing on the podcasts this week.

The funding side is rotating out of the yen. Badwaj's core point is that the Bank of Japan is cornered into hiking. Yen shorts, the classic way to fund carry by borrowing cheap yen to buy high-yielders, are "at a three-decade extreme high." If the BOJ signals a faster hiking pace (he floated a move to "once every three months rather than once every six months"), that forces a "systematic unwind of the yen shorts." And an unwind means the money has to find a new funding currency:

"We think the Canadian dollar could potentially be one funder given that the Bank of Canada is the least likely to hike... The Swissie potentially as well." Jati Badwaj, TD Securities

For a book, that's a concrete shift: the cheap-to-borrow leg of the carry trade is moving from JPY toward CAD and CHF. Get the funding leg wrong into a BOJ hike and a crowded yen-short unwind can run you over.

The EM longs he still wants, and the ones he doesn't:

  • South African rand (long, his top pick): "The South African rand is one which we've been flagging to clients for quite some time. I think there's still more room for the currency. It's very well commodity diversified. Benefits with gold prices sticking up." Even with gold's pullback this week, the structural case (a commodity-diversified high-yielder) is his cleanest EM long.
  • Brazilian real (long, but not yet): The real has been "a favorite pick for so long," but Badwaj is standing aside into Brazil's election: "Before every single election, two months into it is the worst time to be into the long real trade." His plan is to buy after the second round regardless of who wins, noting that even under Lula, whom "markets consider unfriendly," Brazil has had "the best four years in the real."
  • Mexican peso (fading): "The Mexican peso as well is extremely looking crowded now." After a stellar run, the peso is the one he is most wary of.

The Fed leg: Badwaj's base case is still no Fed hike, but "if they were to hike, we think it will be twice," with markets already pricing about 60 basis points. Either way, he thinks the interest-rate differentials that drive FX are set to widen, pressuring the funders and rewarding the survivors.

The next data point to watch: the US CPI print due next week, which Saxo's Hardy called the release in "really massive focus," plus the September 16 FOMC decision itself. A hot CPI cements the hike and the dollar floor; a soft one reopens the door for the dovish case below.

The debate

Bull case for EM carry (soft-dollar, high-real-rate camp): This is the view that got knocked back this week, but it isn't dead. TD Securities' Badwaj still argues the dollar is "in somewhat of a bearish regime," "the dollar finds it easier to sell off than rally here," because global investors keep buying US assets (hyperscaler debt, AI plays) but hedge out the dollar exposure, and those hedge ratios "have not completely gone back to where they were pre-Trump." As long as that's true, high-real-rate, commodity-backed EM currencies like the rand keep their appeal. The managed and commodity-diversified names give you a durable line to trade against.

Bear and skeptic case (this is where the week leaned): The dollar now has a floor, the basket's dollar tailwind is gone, and a Fed that's genuinely hiking widens rate differentials against the crowded longs (see: the peso). MUFG's Halpenny effectively made this case by arguing the debasement trade fades when rates rise and a march to DXY 100 is on the table.

The wildcard, "it's mostly talk, and inflation is about to roll over": The most interesting contrarian voice was Andreas Steno Larsen on Macro Mondays (Aug 31). He runs a language-processing model on Fed communications, and his finding was a surprise:

"At first glance, it was admittedly a hawkish speech. But was it more hawkish than... the various of the lieutenants in the weeks prior? No. It wasn't more hawkish... It was more or less just the same." Andreas Steno Larsen

His deeper point is about the inflation gauge Warsh chose to anchor on. Warsh re-cemented the PCE index as the Fed's target "right when the PCE is about to roll over." Steno Larsen notes the gap between the (hotter) PCE and the (softer) CPI is the second-widest since 1960, the only bigger gap was in 1983, "an inflation that fell off a cliff." His base case: a soft inflation window between Q4 and Q1, meaning one hike doesn't start a cycle. If he's right, the dollar floor is temporary and carry gets its tailwind back into 2027.

Even Apollo's Slok flagged the catch: "What really, of course, is critical now is whether those words are followed up by action at the next meeting." A Fed that talks tough but doesn't hike in September risks a "cry wolf" moment, and hands the doves the narrative.

Read-throughs

  • Broad dollar / DXY: The pivot point for everything EM. MUFG targets a grind to 100; a hawkish Fed removes the falling-dollar tailwind. This is the master switch, watch it before any single-currency trade.
  • Rand (EZA) and gold: The rand is TD Securities' favored EM long on commodity diversification, but gold's 3% to 4% drop this week (below its 200-day average, per Saxo and Money Metals) is a live headwind. The rand's fortunes track gold more than fiscal noise right now.
  • Brazilian real (EWZ): Structurally liked by TD, tactically on hold for election headline risk. The read-through: don't chase Brazilian equity or FX exposure into the vote; wait for the second round.
  • Mexican peso (EWW): Flagged as "crowded" after a huge run, the most vulnerable EM long to a stronger dollar and widening US rate differentials.
  • Yen and the funders: With the BOJ set to hike and yen shorts at a 30-year extreme, a disorderly unwind is the biggest cross-market risk. The dollar rallied against the yen even so (back near 160), and the new funding currencies to watch are CAD and CHF.
  • Euro cycle and CE3 (PLN, HUF, CZK): Not voiced directly this week, but the backdrop firmed: Saxo flagged Germany's two-year yield pushing above 3% (3.01%) with the one-year-forward rate near 3.38%, "massively high real interest rates for an economy that is just sputtering along." A higher euro-rate backdrop is a mild support for the currencies that ride the euro's coattails, even as the energy-price shock weighs on the region's growth.
  • Oil and Brent: Fresh Strait of Hormuz strikes pushed Brent to about $97 before easing to $95 (Saxo, Sept 2), with diesel the real pinch point, refined-product premiums over crude have blown out past 100%. That's an inflation tax that keeps central banks, developed and emerging alike, leaning hawkish, reinforcing the "higher-for-longer" carry environment Badwaj described.
  • Global bonds (EMB, local debt): The through-line under all of it. The US 10-year hit 4.8%, Japan's 10-year touched 3% for the first time since 1996, and UK yields reached post-financial-crisis highs. As Unhedged put it, a rising US 10-year "helps to set borrowing costs for everybody everywhere." Rising core yields compress the relative appeal of EM local debt even when the carry looks juicy.

What changed

For most of the summer the podcasts told one story: a falling dollar plus record-high carry positioning meant "carry is the trade of 2026," and the only real question was whether the basket was too crowded. Warsh's Jackson Hole speech was flagged for weeks as the fork in the road. This week it resolved, hawkishly.

The shift, concretely:

  • The dollar tailwind is gone (for now). The bull case rested on a weakening dollar. With MUFG targeting DXY 100 and the debasement trade fading, that leg has been kicked out.
  • The funding side is moving. For months the assumption was cheap yen funds everything. Now, with the BOJ cornered into hikes and yen shorts at a three-decade extreme, TD Securities expects the funders to rotate toward CAD and CHF. That's a genuine change in the plumbing of the trade.
  • The longs are being sorted by quality. It's no longer "buy the whole basket." It's buy the commodity-backed, high-real-rate names (rand), stand aside on election risk (real), and back away from the crowded winners (peso).

The trade that used to run on a falling dollar now has to run on local real rates and commodity backing. That's a harder, more selective trade, and a more interesting one.