The dollar jitters as the global bond sell-off deepens

The US Treasury made another attempt to soothe bond markets

After the US’s yen intervention in late-July, widely thought to have been to limit Japanese selling of US government bonds, Treasury Secretary Scott Bessent took further steps in August. The decision to buy back additional longer-dated bonds was framed as an injection of liquidity, but the market instead took it as a sign that trouble was afoot, and dollar sentiment weakened. GBPUSD reached a six-month high of 1.3676, and EURUSD breached 1.1700 for the first time since May. Meanwhile at the Federal Reserve, Kevin Warsh’s communication approach remains a very light one, but at the annual Jackson Hole symposium he stressed the importance of containing inflation. The dollar found some respite as markets now see a rate hike this month as more likely than not. However, it feels there are chapters yet to be written in the Treasury bonds story.

A European Central Bank rate increase is expected this month

August was a typical August for the euro – quiet. The ECB’s interest rate outlook, as has been the case for some time now, is less uncertain than that of its peers, which has probably contributed to that lacking EUR volatility. At 2.25% the ECB’s Deposit rate is relatively unrestrictive, and at 3.3% year-on-year CPI inflation is well above the central bank’s target. According to our economists’ forecasts, price growth will not return to the 2% target until 2028. That inflation profile is heavily dependent on the conflict in the Middle East and the evolution of energy prices, but the ECB shares a similar view. It is no surprise then that an ECB rate hike is 98% priced in for this month. The bigger question is whether that is followed with another move before the end of the year. Currently, markets reckon we’ll see another move in December, which could support the euro before a period of political uncertainty early in 2027.

Sources: Investec, Macrobond, Bloomberg

Andy Burnham’s UK premiership really begins now

The House of Commons returned from its summer recess this week, bringing the first round of Prime Minister’s Questions for the former Greater Manchester mayor. The new government’s first Budget is set for 28 October, so the rumour mill will start churning on that front too. So far, Burnham has done fairly well to soothe gilt markets’ initial fears about his premiership, but the recent bond selloff puts the Budget in sharp focus. Anything jeopardising fiscal sustainability would likely be punished by the market and would see sterling suffer. Sterling drivers have been few and far between this past month, but the prospects of shifts in both fiscal and monetary policy pose two-way risks for the pound. At the Bank of England, markets look for 38bps of interest rate rises this year, while our economists expect no change before rate cuts in the second half of next year.

The Norwegian krone continues to outperform 

Driven by high domestic interest rates as well as still-climbing gas prices, the NOK has rallied over the past two months. The carry trade is also helping the AUD, which has similarly outperformed peers. NOKSEK has been the standout currency pair in G10 FX so far in 2026, rising by more than 13% year-to-date and more than unwinding the Swedish krona’s rally over 2025. Meanwhile, perennially in focus is the Japanese yen. The yen was central to one of the biggest conversations in markets last month after the US Treasury jointly intervened to strengthen the JPY, yet the weakening resumed and USDJPY sits around 160.00 again. Now we look to be on the verge of a Bank of Japan interest rate hike. That, and a view to further tightening, could help the yen’s recovery.

Sources: Investec, Macrobond, Bloomberg
Notes: uses an equal-weighted index for each currency against the other nine in the G10

Forecasts

Sources: Investec, Macrobond, Bloomberg

Sources: Investec, Macrobond, Bloomberg

Sources: Macrobond, Bloomberg, Investec

Notes: Forecasts are produced by Investec Economics and are for end-quarter
Chart data as of: 11:50 BST, Wednesday 2 September