FX WRAP: Dollar finishes the week lower despite rebound in US yields

USD was little changed, again failing to track the move higher in US yields, remaining the casualty of the planned increases to the US Treasury buyback operations on the long end. The US Treasury announcement is to be a key topic at next week's Jackson Hole; however, Chair Warsh is likely to navigate the questioning similarly to Daly and Musalem this week, namely, referring to the Fed's dual mandate, independence from fiscal policy, and commitment to 2% inflation. The dollar's correlation to the US 2yr yields and oil prices will be scrutinised early next week given the new wave of US sanctions on Iran that will be announced next Monday. Thus far, Iran is standing firm, claiming the US operation will fail. Elsewhere, USD was muted towards a mixed S&P Global Flash PMI August report, which saw manufacturing miss and services beat. DXY now trades at 98.82 down from last week's close of 99.64.

Antipodeans outperformed after China’s Vice Finance Minister pledged additional fiscal policy measures, echoing similar rhetoric from July’s Politburo meeting. The continued rally in precious metals also supported the move higher. 

EUR/USD was little changed even with EZ flash PMIs signalling solid Q3 GDP growth, a return to hiring and inflation remaining elevated by historical standards. EUR/USD hit a session high of 1.1711 before retreating to 1.1680.

A weekly wrap of this kind, dollar softer despite firmer Treasury yields, points to a breakdown in the rates-FX correlation that has historically been the more informative signal than either leg on its own. Episodes where the dollar fails to track the front end or belly of the curve higher have tended to reflect supply-side or issuance dynamics at the long end, or a market leaning on policy credibility rather than growth differentials, and such divergences usually resolve either by yields retracing or by the dollar catching up once the issuance story is digested. The separation worth drawing is between a dollar move driven by Treasury operations, which is mechanical and often transient, and one driven by shifting rate expectations, which persists. The follow-ons flagged here fit the established pattern for a late-summer calendar: a symposium appearance by the Fed leadership, where chairs have historically leaned on mandate language and deflected fiscal questions, plus a sanctions decision with a crude channel, where the dollar-oil correlation has historically tightened when the geopolitical risk premium in energy rises. The antipodean bid on Chinese fiscal pledges is a familiar sequence, with such pledges tending to support the bloc first through sentiment and only later through confirmed flow.