August opened with commodity currencies ripping higher and the dollar bleeding out across the board. The final month-to-date chart shows the rally has moderated but the greenback remains on the defensive.
The real story broke on August 19, when Treasury Secretary Scott Bessent doubled liquidity-support buybacks in the 10- to 20-year and 20- to 30-year sectors from $2 billion to at least $4 billion per operation. The 30-year yield dropped 8–10 basis points, gold surged 4.3% to $4,525/oz, and the dollar sold off. That was the tell.
This was not an isolated decision. As Yahoo Finance reported on August 9, Bessent had already staged the first U.S. yen intervention since 1998, nudged Tokyo toward the Fed's FIMA repo facility to avoid Treasury sales and altered bond-sales guidance to open the door to long-bond supply cuts. Priya Misra at JPMorgan Asset Management called the sequence an attempt to signal that Treasury "does not hesitate to use the different tools at their disposal." The 30-year had just printed 5.33%, a 19-year high. Within 24 hours, the fiscal authority stepped in. There is now a put under the long bond.
Key Drivers
The Bessent Put and the $40 Trillion Reality
The U.S. national debt has crossed $40 trillion. The Treasury is running deficits near $2 trillion annually. And yet Bessent is using taxpayer cash to buy back long-dated bonds, not to reduce debt, but to cap the interest rate on it. When you run a deficit, you have to finance it. You do not buy back your own paper unless you are monetizing or reshuffling the deck while the ship takes on water.
Charlie Bilello put it plainly: "The Treasury Department is calling this a 'debt buyback.' But they're not reducing the debt. They're running huge deficits, buying back old bonds, and issuing even more new ones. This is debt reshuffling, not debt reduction." At $40 trillion, every basis point on the long end is a budget line item. Bessent is not managing a portfolio, he is defending a debt spiral.
Deutsche Bank framed the move as "soft-form financial repression." The mechanism is devastating for the USD: if Treasury prices are not permitted to adjust downward, the foreign-exchange value of those Treasuries, as held by overseas investors, must absorb the adjustment through a weaker USD.
Matt Weller at FOREX.com offered the cleanest analogy: it is not QE (the Treasury, not the Fed, is acting) and it is not yield-curve control (no explicit target). It is an implicit "Operation Twist," with the Treasury issuing more bills at the front end to fund the removal of duration from the long end.
Andreas Steno Larsen added the critical nuance: Bessent is revealing his pain threshold. The long-end yield was hurting the Treasury's budget math, so he acted. This is debt management, not monetization, buying back long paper and funding it further in on the curve. The risk is that flooding the front end with bills eventually forces the Fed to restart reserve-management purchases to keep money markets functioning, a second-round liquidity effect that would be unmistakably easing.
Steno's framework is useful for positioning: the buyback shifted the market toward a "bull flattener" (long end dropping faster than short end), which compresses term premia and real rates. That favors scarce assets. Gold and Bitcoin, over credit-dependent cyclicals and Tech. The preferred regime for a hot cycle is the "bull steepener" (front end dropping, long end left alone), which is what Bessent is ultimately gunning for with Fed help.
Canada-U.S. Trade Talks Collapse: CAD Takes the Hit
The biggest FX-specific event of the month happened late on Friday, August 21, when U.S.-Canada trade negotiations collapsed just hours before a midnight deadline. The 50% tariffs on roughly $20 billion of Canadian goods took effect immediately.
Prime Minister Mark Carney walked away from what he called "a bad deal," blaming last-minute U.S. demands that were "uneconomic, unfair, and undermined the net benefits for Canada." The final sticking points were severe: the U.S. excluded medium and heavy-duty pickup trucks from tariff relief, a carve-out hitting Ford's F-Series and GM's Silverado built in Ontario and demanded restrictions on Canada's ability to strike trade deals with other countries, effectively a sovereignty grab.
The market punished the loonie immediately. CAD gave back nearly a full percentage point of its month-to-date gains, falling from +1.80% to +0.87%, the single largest reversal in the G10 basket. Carney has promised dollar-for-dollar retaliation effective September 8, targeting U.S. steel, dairy, appliances, agricultural equipment, pulp and paper, and electronics.
The economic fallout is material. University of Calgary economist Trevor Tombe estimates roughly 87,000 Canadian jobs are at risk from the new tariffs, 52,000 directly in tariffed sectors and 35,000 more among suppliers. Ontario and Quebec will bear the brunt. And Trump has already escalated, threatening 50% tariffs on all Canadian cars, trucks, parts, and steel starting January 1, 2027.
For FX dealers, the CAD trade is no longer a commodity-currency proxy. It is a trade-war proxy. The oil bid from Hormuz is still there, but it is now fighting against a structural tariff headwind that will not resolve quickly. Carney has public support, 76% of Canadians say walking away was the right call, but that political resolve comes at the expense of the currency.
Jackson Hole: Warsh Speaks, Little Changes
Fed Chair Kevin Warsh delivered his first Jackson Hole keynote on Friday, August 28, and the message was high-altitude. Warsh declared that "the Fed's predominant focus right now should be on prices," noting that inflation is running above the 2% target across every measure the Fed tracks.
For a market desperate for specifics, the speech offered framework, not forecast. Warsh devoted significant time to his critique of forward guidance, calling it a "hall-of-mirrors problem" that blinds policymakers to new developments. The message: stop trying to read the Fed's mind, because the Fed has stopped telegraphing.
The market was hoping for clarity on whether Warsh would acknowledge the Treasury buyback as an easing of financial conditions, or whether he would push back against Bessent's implicit yield-curve management. He did neither. The speech stayed firmly in the structural lane, productivity, demographics, financial innovation, and avoided the Treasury-Fed dynamic entirely.
The bottom line from Jackson Hole: the Fed is not riding to the USD's rescue. Warsh remains committed to price stability in the abstract but has offered no concrete path. The committee is split, three dissents at the July meeting, with hawks warning inflation is becoming entrenched, and the chair's refusal to engage in forward guidance means markets will be flying blind into the September 15-16 FOMC. Markets are pricing roughly a one-in-three chance of a September hike.
Geopolitics and Energy
The commodity bloc's outperformance is not just a rates story. The closure of the Strait of Hormuz has tightened global oil supply materially, with the IEA assessing it as the largest disruption "in the history of the global oil market." The IEA now forecasts a Q3 deficit of 1.8 mb/d, more than double its initial estimate. That supply shock has given AUD and NOK a direct bid, though CAD has been overwhelmed by tariff fears.
Central Bank Divergence and Fed Pricing
The Fed remains on hold at 3.50%-3.75%. The derivatives market has slashed hike expectations dramatically, fed funds futures finished last week pricing less than 8 basis points of tightening for the next meeting, down from 18 bp at the end of July. The ECB is parked at a 2.00% deposit rate, with swaps pricing roughly an 85% chance of a hike in September. The BoE holds at 3.75%, and Norges Bank remains the G10 hawk at 4.00%.
Notably, the USD's correlation with the U.S. two-year yield has tightened to near 0.60, its highest in nearly two months, confirming that the greenback remains a rates-driven currency even as Treasury supply management distorts the long end.
The Yen Intervention as Treasury Defense
The July yen intervention was not primarily about yen weakness; it was about preventing Japan from becoming a forced seller of Treasuries. Barry Eichengreen, cited by BBVA's Rafael Domenech, noted that the U.S. Treasury used euros and Japan utilized the Fed's FIMA repo facility precisely to avoid outright Treasury sales. Luke Gromen drew the stark conclusion: "If UST reserves cannot be sold in a crisis without making said crisis worse by threatening a debt spiral, then UST's are no longer fit for purpose as FX reserves. In contrast, earlier this year, gold reserves were sold easily & quickly & de-escalated the crisis."
That reserve shift is already showing up in the data. Gold has now overtaken U.S. Treasuries as the world's top reserve asset by market value among central banks.
What to Watch
September 8: Canada's retaliatory tariffs take effect. Watch for further escalation from Trump, who has already threatened 50% auto and steel tariffs for January 2027.
September 9: Larger Treasury buybacks take effect. If the 30-year yield breaks back above the 5.33% high despite the doubled operations, the market will conclude the Bessent Put has failed, and the USD will take the next leg lower.
September 10: ECB meeting. Swaps price an ~85% chance of a hike. A move while the Fed is on hold would widen the transatlantic spread and add EUR/USD momentum.
September 15-16: FOMC with press conference. No hike is priced, but the dot plot and Powell's tone will matter. The key question is whether the Fed leans against the Treasury's easing or accommodates it.
September 17: BoE and BoJ meetings. Any hawkish surprise from the BoJ would unwind yen carry and add fuel to the USD's downside.
U.S. CPI/PCE: With energy back in the mix, an upside surprise could theoretically revive the dollar, but if Treasury is actively capping the long end, the FX transmission may be broken.
Conclusion
The central bank divergence table is straightforward: the Fed is on hold at 3.50%-3.75% with less than 8 bp of a hike priced for next month. The ECB is likely to hike in September. The BoE is paused. Norges Bank is the lone hawk at 4.00%. The BoJ is the dove. But the real divergence this month is not between central banks, it is between the U.S. Treasury and the USD.
Bessent had a choice: let the long end clear at higher yields and risk a fiscal crisis into the midterms, or cap yields and absorb the currency weakness. He chose bonds and the USD is paying the price. Jackson Hole confirmed that Warsh will not push back against this dynamic.
Thanks to the trade war, the CAD is no longer a clean commodity play; it is a tariff play, and the downside is open-ended until either Carney or Trump blinks.
The Fed is not driving the bus anymore, Treasury is. And the bus is headed down a weaker-USD road, with a put under the long bond and the USD as the release valve.