Bessent Doubles Down, Dollar Slumps But Rates Little Changed

The market is pushing against the US recent initiatives. Japanese investors themselves have continued to buy foreign assets in size in the first two weeks after the intervention. The Ministry of Finance data showed Japanese investors bought around $36.5 bln of foreign assets in the first two weeks of August.  Treasury Secretary Bessent expressed puzzlement over yesterday’s 2% rally in October WTI, though its was the 10th increase in the past 11 sessions as the market does not accept US claims that it controls the Strait of Hormuz or that Iran has been defeated.  After initially reacting by surprise to Bessent’s announcement that he was going to at least double the repurchases of US bonds, the market seemed unimpressed.  Buybacks of $32 bln quarterly figure, twice the current pace, would have much lasting impact in $31.5 trillion market, with average daily turnover estimated to be around $1.0-$1.2 trillion. The 10-year yield returned to the 4.70% area where it was before Wednesday’s announcement. 

Still, late yesterday Bessent indicated the administration will announce a new fiscal initiative to address the higher yields. This appears to have fueled dollar losses today. It does not appear to include plans to reduce the deficit, which may be around 6% of GDP this year. The US 2-10-year yield curve is twice as steep as it was before Kevin Warsh chaired his first FOMC meeting in mid-June. And now, market participants are now assessing the administration’s new overtures to North Korea, when the sister of Kim Jong-un indicated she was “unaware” of any communication with Washington.  President Trump said the Korean dictator and responded to his outreach.  The scaled-back military exercises with South Korea may add more pressure on Seoul for trade concessions and antagonize public opinion there more than thaw the relationship with North Korea. North Korea reportedly fired a “barrage” of short-range ballistic missiles late yesterday, the third weapons “test” this month. 

Prices

G10

• The euro peaked near $1.1710 yesterday, slightly ahead of the North American open.  It was sold to around $1.1665 before stabilizing.  It has returned to yesterday’s highs, helped by a firm preliminary August PMI and US Treasury Secretary Bessent’s suggested a new fiscal initiative will be announced shortly to address the high US borrowing costs. The $1.17 area, as we have noted, corresponds to the (50%) retracement of the euro’s decline from the January high (~$1.2080).  The next retracement (61.8%) is a little below $1.18. 
• The drop in US yields saw the greenback fall to almost JPY158, which corresponds to the (38.2%) retracement of the post-intervention dollar bounce.  The dollar recovered to a little above JPY159.15 yesterday in North America. A firm national CPI reading, in line with the Tokyo report a few weeks ago, a six-month high in the composite August PMI, and the Bessent’s hint pushed the dollar back to around JPY158.35 today, where the 200-day moving average is found. A break of JPY158 could spur a move to JPY157.50 initially. 
• Sterling reached a six-month high yesterday, near $1.3660. It consolidated in North America and held above $1.3620. Follow-through buying today lifted sterling to $1.3675.  The PMI was firm, but retail sales were soft and sterling appeared caught up in US dollar weakness.  The next nearby technical target is $1.3700-10. 
• The US dollar was initially sold almost CAD1.3755, its lowest level against the Canadian dollar in three months. The greenback stabilized in the North American session and held below previous support (CAD1.38). Today’s broad greenback decline took it to about CAD1.3745. Chart support is in the CAD1.3700-15 area. 
• The Australian dollar made a marginal new high yesterday, almost $0.7135, its best level since June 5. It pulled back but bids emerged in North America ahead of $0.7100. It has come back bid today, despite the softer composite PMI.  It reached $0.7165 today. It has approached a band of resistance seen in the $0.7170-$0.7200 area.

 
EM

• The Mexican peso consolidated yesterday within the range set Wednesday when it rose to its best level since mid-2024 election run-up. The dollar held above MXN16.9425 but was unable to overcome MXN17.00. The greenback has been sold slightly below MXN16.89 today, as dollar-carry trades come back into favor. Yesterday, the dollar rose by about 1.1% against the Colombian peso, its best showing since in two weeks.  The greenback was capped slightly above BRL5.20 yesterday as it also traded within Wednesday’s range. Look for yesterday’s gains to be retraced. 
• The dollar recorded its three-and-a-half year low against the offshore yuan in Europe yesterday, near CNH6.72. During the consolidation in the North American session, the dollar was unable to rise above CNH6.7275. Although the PBOC set the dollar’s reference rate slightly higher today, for the first time in three sessions, the dollar has continued to fall against the offshore yuan.  Today’s fix was at CNY6.7817 (CNY6.7808 yesterday and CNY6.7878 a week ago). The dollar was sold to CNH6.7180 in early European turnover. 
• The dollar slipped ever so slightly against the Indian rupee today (-0.1%) but it was the first back-to-back decline since the start of the month. Reports suggest the central bank has continued to intervene to support the rupee, which fell a little more than 0.25% this week, settling at INR95.7050.

 
Other Markets

• Yesterday’s US equity losses were shrugged off in Asia and Europe today. Most of the large bourses in the Asia Pacific region rose, though Australia was a notable exception (~-0.25%) MSCI’s regional index appears to have posted its first weekly loss in five weeks. Europe’s Stoxx 60its losing is trying to snap a seven-day decline. The last time it fell for eight consecutive sessions was Nov-Dec 2016. US index futures point to a strong open. Nasdaq futures are up around 0.7% and S&P 500 futures are up about 0.35%. 
• Benchmark 10-year yields rose the Asia Pacific region by 4-5 bp, dragged higher by the backing up of US rates yesterday. European yields are slightly lower today, while the 10-year US Treasury yield is off almost one basis point to a hair below 4.70%. It is off about 2.5 bp this week, while European yields are mostly 3-4 bp higher on the week. The 10-year Gilt yield is virtually flat.  The 3.5 bp decline in the 10-year JGB yield this week is the best among the high-income countries. 
• Gold recovered from the initial test yesterday on $4445. It reached the session high in North America ($4541). It has taken another leg higher today and briefly traded above $4600, its best level since mid-May. It has now retraced a little more than (38.2%) of the loss from the record high recorded in late January (~$5595). Settlement above $4575 would be constructive and the next retracement (50%) is near $4770.  Silver rose to almost $70 today, its highest level since June 18. Its (38.2%) retracement target of this year’s loss is still some distance away (a little above $80). 
• October WTI rose to almost $87.70 early in the North American session, its highest level since July 23, when it reached slightly above $88.  It fell back around $85.70 where it found new bids.   It is consolidating with a firm bias between about $85.80 and $87.50. After a 5.6% rally last week, the contract is up a little more than 7% this week. 

Data

• The preliminary US August PMI is expected to slip a little, especially the services and composite measures.  Recall that the composite surged to 54.5 in July from 51.9 in June to reach its best level since last October.  It averaged 51.7 in both Q1 and Q2 26. 
  • Canada’s retail sales are expected to have risen by 0.4% in June after a strong 1.0% rise in May. That is StatCan’s flash estimate and the median in Bloomberg’ survey. 
  • Mexico also reports June retail sales. They may have stabilized after falling by 0.6% in May. Mexican retail sales rose an average of 0.1% in the first five months of the year compared with an average monthly gain of 0.4% in Jan-May 2025. 
  • The eurozone’s preliminary PMI ticked up in August, with the composite to 52.1 from 52.0, a nine-month high. Ironically, Germany and France’s composites slipped. Manufacturing rose in both. The ECB’s inflation survey slipped to 2.9% from 3% for the one-year outlook and 2.7% from 2.8% for the three-year outlook.  Negotiated wage settlements were a little lower at 2.44% from a revised 2.56% in Q1.   
  • The UK ends a busy data week with a flurry of reports. The takeaway is that shoppers pulled back in July, and retail sales (reported on a volume not price basis) fell 0.5% after rising 0.7% in June (1.0% initially). The preliminary August PMI was firm, with the composite rising to 52.5 from 52.2.  While the services PMI jumped to 52.8 from 52.1, the manufacturing PMI eased to 51.5 from 51.9. Separately, the government unexpectedly reported a GBP1.8 bln budget deficit in July. The Office for Budget Responsibility had projected a balanced budget. 
  • Australia’s preliminary August PMI fell to 52.5 from 53.2.  The manufacturing PMI was unchanged at 52.0, while the services PMI eased to 52.9 from 53.6. When everything is said and done, the economy has held up after the central bank delivered three hikes earlier this year. 
  • As the Tokyo CPI hinted, Japan’s July CPI rose to 1.9% from 1.6%. The core rate, which the central bank ostensibly targets, rose to 1.8% from 1.6%.  It has not been above the 2% target this year. Separately, Japan’s flash August PMI slipped.  The composite now stands at 53.4 (vs 52.7 in July). The swaps market has about an 82% chance, which is virtually flat on the week but up from around 22% before the intervention at the end of last month.