Newsletter · · Ashutosh Agarwal

Tokyo Holds the Yen Steady as the Dollar Hits New Local Highs - The Dollar Brief - Week of September 30, 2026

The Dollar Brief for the week of September 30, 2026 (podcasts published September 29): the dollar made new local highs with euro-dollar near 1.1350 while two Tokyo officials in two days kept dollar-yen pinned, real yields hit their highest since 2008 on competition for capital rather than inflation fears, consumer confidence fell to its lowest since 2014, junk spreads widened to 303 and gold kept sliding.

The Dollar Brief

Week of September 30, 2026: Tokyo Holds the Yen Steady as the Dollar Hits New Local Highs

Yesterday's issue asked a simple question. If a 20-year high in Treasury yields can't lift the dollar, what will?

Tuesday gave a partial answer: just wait a day. "We have seen the dollar affirming a little bit further," Saxo's John Hardy said on Tuesday's Saxo Market Call. The dollar was "making new local highs here, pretty minor stuff," with the euro down to about $1.1350.

The one place it couldn't win was Japan. Two senior Tokyo officials spoke up in two days, and dollar-yen stood still while the dollar rose against almost everything else.

Underneath it, the week's podcasts kept circling one idea. Bond yields aren't rising because people fear inflation. They're rising because bonds are now competing for money, with AI borrowers, with Japanese savers who can finally earn something at home, and with each other. That matters for the dollar, because it decides whether high US yields pull money in or simply reflect a world where money costs more everywhere.

(A quick glossary. A "yield" is the interest rate on a bond; it rises when the bond's price falls. A "basis point" is one-hundredth of a percentage point. A "real yield" is the yield after subtracting expected inflation. "Dollar-yen" is how many yen one dollar buys, so a falling number means a stronger yen. "Verbal intervention" is when officials try to move a currency with words, not actual buying or selling. A "yield curve inversion" is when short-term bonds pay more than long-term ones, a classic recession warning. A "credit spread" is the extra interest a company pays over the government to borrow.)

TL;DR

  • The dollar made new local highs on Tuesday. Euro-dollar slipped to around 1.1350, per Hardy (Saxo Market Call, Sep 29). He called the move "pretty minor stuff," but it broke Monday's standstill.
  • Tokyo doubled up its warnings. After currency diplomat Atsushi Mimura on Monday, Finance Minister Satsuki Katayama said the US and Japan are on the same page on intervention. Result: "dollar yen is just unable to fall with the firmer and broader dollar," but it isn't rising either.
  • Real yields are the highest since 2008. The 10-year yield minus expected inflation is about 2.85%, and inflation expectations themselves are "well anchored" (The Compound and Friends, Sep 29). This is a price-of-money story, not an inflation-panic story.
  • Consumer confidence fell to its lowest since 2014. The Conference Board index dropped 6.7 points to 81.9 (C-Suite Perspectives, Sep 29). The sharpest drop came from upper-middle-income households (Marketplace).
  • Credit stress kept creeping. Junk bond spreads widened another 9 basis points to 303, up from about 265 a week ago. Hardy's global risk model is "in its worst state" since the 2025 Liberation Day tariff shock.
  • Former Bridgewater strategist Andy Constan is short stocks, long bonds and slightly long the yen. He thinks Washington will try to force yields back down, and that if it works the "dollar to weaken" follows (The Julia La Roche Show, Sep 29).
  • The reserve-currency debate got a sober data point. CPM Group's Jeff Christian said the dollar's share of central bank reserves has slipped only from about 60% to 57–58%, and that BRICS finance ministers didn't even mention leaving the dollar at their August meeting (The KE Report, Sep 29).

What's new

Tuesday: the dollar edges up, the yen stands firm

After Monday's puzzle (yields up, dollar flat), Tuesday looked more normal. Hardy tied it directly to rates: "with the higher U.S. Treasury yields, we have seen the dollar affirming a little bit further." The euro hit "$1.1350 or so" just before he recorded.

Why the yen didn't join in. Hardy walked through the double act from Tokyo:

  • Monday: currency diplomat Atsushi Mimura told markets they "need to heed our warnings."
  • Tuesday: Finance Minister Katayama talked about "the whole U.S., Japan being on the same page on intervention and not being comfortable with FX levels."

So "the yen is a little bit firmer in the crosses," meaning against currencies other than the dollar. Against the dollar itself, it's a stalemate. Dollar-yen "is just unable to fall" because the dollar is broadly firm, but officials won't let it climb either.

A second reason the yen may be sturdier than it looks. Hardy flagged a theory making the rounds: some of the global funding stress comes from "Japan moving money back home or keeping money in Japan because the yields on offer there are competitive with the rest of the world." Supporting it, Japan just held "a very strong 40-year JGB auction" (JGBs are Japanese government bonds). If Japanese savers no longer need to send money abroad to earn a return, that's a slow, steady support for the yen and a small loss of buyers for US Treasuries.

On The Compound and Friends, Josh Brown made the same point in plain terms. The "carry trade," borrowing cheaply in yen to invest at higher rates elsewhere, gets less appealing "as the yen appreciates and the bond yield in Japan goes positive." That means "less incremental buying from overseas" for US bonds, "a mechanical thing that U.S. investors don't pay any attention to."

The Aussie dollar slips below 70 cents

Australia's central bank raised rates overnight, but Hardy called it "a dovish hike." The hike was expected, and the guidance showed "reluctance to continue to ratchet the rate higher."

The Australian dollar fell "below that psychological zero spot 70 level," meaning below 70 US cents, and is sitting "decently" under its 200-day moving average, a widely watched trend line. Hardy's verdict: "it's kind of getting into the last gasp area for any bullish case." (Yesterday's issue had it "stuck at 70.2 US cents," per NAB.)

Real yields at 2008 highs, and why that's not about inflation

The most useful chart of the day came from Matt Cerminaro on The Compound and Friends. He took the 10-year Treasury yield and subtracted the market's expected inflation rate. The result "is hitting highs going back all the way to 2008," at about 2.85% after inflation.

His key point is what's not happening: "inflation break-evens are well anchored." In other words, markets don't expect runaway inflation. "The reason for the rise in interest rates is not coming from this expectation that inflation is going to surge higher."

So what is it? Brown called it a game of Clue with several suspects:

  • Corporate borrowing. Citing Ed Yardeni (the strategist who coined "bond vigilantes"), Brown said corporate debt issuance "has doubled in a year" as AI spenders switched from paying cash to selling bonds. "If you can buy Alphabet paper at a 5% yield or slightly higher, right, it's a better option" than a Treasury.
  • Japan's unwind. Less yen carry means fewer overseas buyers.
  • Oil. "We're, like, in month four of a war overseas," and it is "now over the passage of oil."

Andy Constan, a former Bridgewater strategist who now runs Damped Spring Advisors, put the long-end real yield even higher on The Julia La Roche Show: "two and three quarters to three and a quarter on the long end of the yield curve."

Why it matters for the dollar. High real yields in the US are normally dollar-positive, because they pay foreigners a genuine return. The catch, as Monday's issue showed, is that yields in the UK, Australia and Japan are climbing too. The dollar only wins if the US gap over everyone else widens.

A new voice at the Treasury: "competition for capital"

Hardy flagged a hire that fits the theme. US Treasury Secretary Scott Bessent has brought in David Zervos, the well-known Jefferies market strategist. Hardy liked that he comes from the market side "rather than somebody coming from a more academic, functional, technocratic angle."

According to comments collected by the FT's Alphaville blog, as Hardy relayed them, Zervos doesn't think the rise in Treasury yields "has anything to do necessarily with a fiscal crisis, but it's more about competition for capital." Hardy connected that straight to "all this debt being issued to build out the AI data centers." It's worth following, he said, for any "pivot or otherwise in the way that U.S. Treasury communicates with the market."

The yield curve is close to flipping

On Real Vision's Macro Mondays, Andreas Steno Larsen of Steno Research laid out the shift. From the start of the Iran war in "late February and March," the pain was in long-term bonds. Now short-term yields are "moving up as well and even faster than longer bond yields."

  • Where the curve stands. In swap rates (the rates banks use with each other), the curve is "already close to inverting or inverted." In Treasuries, the 2-year versus the 10-year is "pretty far from inverting still. We'll probably get there."
  • His call. "The safest bet right now is to bet on a continued flattening of the yield curve," which he expects to continue "all the way up until the point where the Fed sort of accepts that now we've done enough."
  • The regime. He puts the US in what he calls "regime four," a Fed hiking into restrictive territory. "It is the business cycle killer."

The AI mask. Steno's sharpest point: AI spending "can, in all likelihood, cope with substantially higher bond yields than other sectors," so "this whole AI build-up kind of hides how restrictive bond yields are already." Outside of data centers, he sees "a pretty weak construction cycle." (This echoes RenMac's Neil Dutta in yesterday's issue: the Fed has to hit the AI-powered part of the economy to tighten conditions at all.)

He also pushed back on the alarm. Stocks after past inversions were "pretty okay" on average over 12 to 15 months, with "choppy trading for, say, a handful of months." "Even though you'll see plenty of alarmism around the yield curve, the data doesn't back it up, really."

Consumers are losing their nerve, especially the richer ones

Tuesday's US data added a soft patch to the picture.

Consumer confidence. On the Conference Board's own C-Suite Perspectives, economist Allen Li said the index "shed about 6.7 points to 81.9," the third straight monthly drop and "just right below the pandemic levels." The last comparable reading was in April 2014.

  • The detail that matters. The "present situation" part is still "well above pandemic lows." The damage is in expectations, which has now fallen for three months.
  • Timing. The survey ran September 1–23, so it captured the Fed's hike and the jump in gas and diesel prices.
  • For the first time since the question began in June 2022 (it has happened once before), more people said their current finances were bad than good.

The upper-income angle came through on Marketplace. Bates College economist Paul Shea said households earning $125,000 to $150,000 "saw the sharpest decline in confidence." Until now, spending by wealthier families has "masked cuts from lower-income families." If they're losing faith, "that could be a real red flag going forward."

Jobs. The JOLTS report on job openings was "pretty steady. Low hire, low fire," per Marketplace. George Washington University's Leah Brooks summed up hiring in one word: "meh." She added a point that fits the capital-competition theme: with government bond yields this high, "investors might be more inclined to put their money into low-risk government bonds than lend it to a higher-risk new business," which "sucks money out of the productive private investment part of the economy."

Why it matters for the dollar. Weakening confidence is the kind of data that could eventually cap how many more Fed hikes markets price in. Yesterday, Hardy argued that ceiling is what stalled the dollar. Friday's payrolls report is the next test.

Credit stress is rising, slowly

Hardy's daily check on corporate credit:

  • Junk bond spreads are "another nine basis points wider" at 303, against "around 265 basis points" a week ago. (Yesterday's issue had 294.)
  • Perspective. "From mid-2007 until all the way into early 2021, there was no monthly close that was even below 300." So this is still "not particularly high stress levels."
  • AI borrowers. An Oracle bond due 2036 has "7.5%" implied yield versus a little over 5% on the matching Treasury.
  • FX volatility "has picked up a bit," even though the VIX, Wall Street's fear gauge for stocks, is "pretty calm."

His own global risk model is "in its worst state since the markets were recovering from that episode, the Liberation Day tariff episode back in 2025," and worse than at the outbreak of the Iran war in March. "The direction of travel is the important thing there, and it's going the wrong way."

Gold's bloodbath, and a stablecoin twist

Gold kept falling. Hardy: "yesterday, really a bloodbath," with spot gold "as low as sub-4150 levels today," over $100 lower.

The usual reasons apply: higher yields, higher oil, rising real yields. But he added a dollar-plumbing story. Tether, the largest dollar-pegged stablecoin, has a market value of "$180-something billion," and "around 10% of those holdings are in gold." A Wall Street Journal report said a Senate investigation found "rampant" use of Tether in transactions with Iran. If that leads to pressure on Tether, its gold holdings could become a source of selling. So far, Hardy noted, there's been no "big run for the exits" in Tether's size.

Elsewhere in stablecoins, Tony Edward on Thinking Crypto (Sep 29) covered Coinbase and Citi's deal to bring "stablecoins into the banking system." Citi's institutional clients will be able to accept stablecoin payments through its Spring by Citi platform, with Coinbase handling the rails and converting to regular dollars for settlement. He also noted Goldman Sachs bringing a "$100 billion treasury fund" onto a crypto settlement network. (Edward is a crypto-industry host; treat the framing as enthusiast commentary.) Every one of those stablecoin dollars has to be backed by short-term US government debt or cash, which is why the plumbing matters for T-bill demand.

Iran: both sides are now waiting for the midterms

On Bloomberg Daybreak (Sep 29), anchors reported that "Iranian officials have privately expressed pessimism about reaching a deal to end the war with the U.S. and reopen the Strait of Hormuz before the midterm elections."

Bloomberg Opinion columnist Marc Champion said "both sides are talking about what happens after the midterms," with Trump considering a return to bombing and Iran ready to escalate. Iran's chief negotiator, Mohammad Bagher Ghalibaf, warned that if Iran can't sell oil, "no one's going to sell oil in the Middle East and no infrastructure in the Middle East will be safe." Champion listed targets Iran has already shown it can hit: Saudi Arabia's east-west pipeline, refineries and Qatar's gas facilities.

Why it matters. Oil is a big reason US yields keep rising. A standoff frozen until after November 3 keeps that pressure in place through the election, which is the midterm risk premium in its most concrete form.

The debate

Are foreigners still buying the dollar and Treasuries, or quietly leaving?

The "still buying" side. Jeff Christian of CPM Group, a longtime precious-metals research firm, made the case on The KE Report:

  • Foreign and offshore investors hold "a record nine trillion dollars in U.S. treasuries," because many worry more about their own governments' debt and "worse credit rating."
  • Treasury auction demand ("bid to cover") is "right there in the norm." There's no sign of buyers walking away.
  • Central bank reserves in dollars have gone "from about 60 percent… to about 57 or 58 percent." The number of dollars held keeps rising because reserves are growing.
  • By his figures, the euro's share fell further, "from like 29 percent to 17 percent," with "all the others" rising to "about 10 percent." (These are his numbers as stated; they differ from some published reserve data, so treat them as approximate.)
  • On the BRICS: at the group's August finance meeting in Jaipur, India, he said, "they did not mention getting away from the dollar. They did not mention gold… And they didn't mention a BRICS currency."

The "leaving" side. Michael Pento of Pento Portfolio Strategies argued the opposite on Commodity Culture (Sep 29): "Our foreign creditors are abandoning the U.S. dollar and the U.S. treasury complex," driven by "sanctions and confiscations." His other reasons:

  • The Bank of Japan "is selling treasuries to support their yen" (his claim), and the yield gap between Japanese and US bonds "is closing, narrowing quickly."
  • "The global anchors" are gone: German and Japanese yields that used to sit near zero are "into the 3% plus range."
  • US debt is "720%" of federal revenue, and the savings rate is "just 3%."

Where this leaves us. The two aren't as far apart as they sound. Both agree Japan's higher yields reduce the pull toward US bonds. The split is over whether that's a slow rebalancing (Christian) or an exit (Pento). The auction data Christian cites is the best test, and so far it favors him. Pento is a longtime gold bull and deficit hawk, and Christian comes from metals research but is skeptical of the de-dollarization story, so each is arguing against his audience's usual expectation in one direction or the other.

Will Washington force yields back down, and what would that do to the dollar?

Constan framed this as the key question. He counts six past cases where yields rose 50 to 125 basis points and then "within weeks fell similarly" after policymakers pivoted, setting off "a massive rally in assets." This is the seventh.

He sees the administration trying: Bessent "is increasing the Treasury buyback" and has "a lever that he can pull at the quarterly refunding in November." Housing regulator Bill Pulte said he'll buy more mortgages. If it works, yields could fall "50 to 100 basis points by election," sending stocks to new highs, "gold to go up above 5,000," and "the dollar to weaken."

But: "I'm not quite certain yet that they're going to." Bessent is "definitely trying. He's obviously not succeeding." If yields go sideways instead, high borrowing costs slow AI spending and consumers, and "that's when I think you need to start lightening up or get short assets."

On Thoughtful Money (Sep 29), Lawrence Lepard of Equity Management Associates, a sound-money investor, put the breaking point for the economy at "6 ought to do it" on the 10-year. He noted the average interest cost on federal debt is still around "three and a half percent," so every refinancing at today's rates makes "the interest tab… bigger for Uncle Sam." Host Adam Taggart pushed back that Q3 GDP "looks like it's coming in at over 5%."

The trades in play

  • Constan's book: at 75% of his maximum risk, "short equities, long, long-term bonds each," plus "a slight long in the Japanese yen" and a long SOFR futures position (a bet on short-term rates falling). He went "max long bonds on Friday into that sell-off" and admitted "it's going in my face this morning." For most people, he said, the right move is to "just own beta," a diversified mix, and not try to time markets (The Julia La Roche Show).
  • The 60/40 is back. Constan's Substack piece, "The 60-40 Strikes Back": bonds now offer real yields and "if interest rates fell 200 basis points, you'd see real appreciation," so they can protect a stock portfolio again. "They should have declared it dead in 2020 when it was obvious there was a bond bubble."
  • Bet on a flatter curve. Steno: short-term yields rising faster than long-term ones is "the safest bet right now" (Macro Mondays).
  • Aussie dollar below 70 cents. Hardy sees the bullish case in its "last gasp area" after the RBA's dovish hike (Saxo Market Call).
  • Stocks aren't broken at 5%. Brown and Cerminaro's chart of forward P/E ratios by 10-year yield level found the lowest stock valuations only above 7% (13.6 times for the S&P 500, 12.6 for the Nasdaq 100). "5% is not the breaking point" (The Compound and Friends).

Read-throughs

  • Japan is the dollar's ceiling right now. Two officials in two days, plus strong demand for Japan's own long bonds, means the yen is the one major currency the rising dollar can't push around.
  • Europe's inflation isn't done. Hardy flagged a "pretty spicy" Spanish inflation reading: 4.9% year on year against 4.6% expected, with core inflation at 3.1%. That keeps pressure on the ECB and gives the euro some support even as the dollar firms.
  • The "rich consumer" is the next thing to watch. If upper-income households pull back, the main support for US spending weakens, and with it the case for more Fed hikes.
  • AI debt is now a macro variable. Zervos, Yardeni via Brown, Steno and Hardy all pointed to AI-related borrowing as a driver of yields. That makes corporate bond issuance a dollar-relevant data point.
  • Stablecoins are becoming bank plumbing. The Citi–Coinbase deal is another step toward stablecoins as a mainstream buyer of T-bills. The Tether–Iran story is a reminder that the same plumbing brings sanctions risk.

What changed since Tuesday's issue

  • The dollar moved. After Monday's flat day, it made "new local highs," with euro-dollar near 1.1350.
  • Tokyo escalated. Finance Minister Katayama joined Mimura, citing US–Japan alignment on intervention.
  • Gold fell further, to below $4,150, from below $4,200.
  • Junk spreads widened to 303 basis points, from 294.
  • The Aussie dollar broke below 70 US cents after a dovish RBA hike.
  • Consumer confidence dropped to 81.9, its lowest since 2014.
  • Iran's hopes of a pre-midterm deal faded further, with both sides openly discussing post-election escalation.