US policy and Treasury supply-demand pressures continue to weigh on the dollar, while global FX performance will diverge further based on rate differentials, energy, gold, and technology exports

Overview

The report covers the US dollar, US Treasury buybacks, the Mexican peso, Canadian dollar, Turkish lira, Asian FX, and the Jackson Hole conference. Its core view is that the dollar remains burdened by US policy and structural pressures in the Treasury market, but non-dollar currencies will not benefit uniformly; their performance will depend on carry efficiency, energy and gold terms of trade, technology exports, capital flows, and domestic policy constraints.

Core views

The report first explains why the dollar has weakened. First, the US Treasury market faces a supply-demand imbalance, but officials do not want to attract demand through lower prices and higher yields on long-duration Treasuries. When bond-price adjustment is constrained, the dollar becomes the residual adjustment channel for attracting foreign capital and financing the US current account. Second, communication from most FOMC voters continues to favor keeping the policy rate unchanged. Even if released data and the expected trajectory could justify that stance, this policy bias will still be reflected in market pricing through a higher term premium, a steeper yield curve, and a weaker dollar. Following supply shocks and upside spending surprises, the rates implied by some Taylor rule specifications are materially above the current policy rate. The report argues that the market's expression of discomfort with the policy setting through a weaker exchange rate implies that only very strong data could prompt a policy shift. Third, the US Treasury's more proactive adjustment of policy tools, including this week's unusual buyback announcement and its prior intervention in EUR/JPY, may also weigh on the dollar beyond the tools' direct policy implications because unconventional actions raise questions about institutional reliability. The report also emphasizes that the current pressure on the dollar differs from the market reaction after “Liberation Day.” Current private-sector debt issuance indicates that investors still see strong return prospects, which is not wholly negative for the dollar. If markets experience more extreme volatility, investors may still expect US officials to adopt a broader macro response. The reduction in US asset allocations by foreign investors caused previously by heightened policy uncertainty, as well as additional hedging demand generated by FX correlations, has not yet reappeared. Accordingly, the report does not equate the current environment with the comprehensive confidence shock seen at that time, but it still expects that the dollar could continue weakening over the following week if Chair Warsh and other FOMC participants do not express concern about recent market signals. The market reaction following Wednesday's US Treasury buyback announcement further supports this view. Although bond yields subsequently rebounded and Treasury Secretary Bessent emphasized fiscal consolidation on Thursday, the impact left on the FX market largely persisted. The report attributes this performance to the reemergence of US policy volatility and the effective transfer of long-end Treasury pressure from US government bonds to the dollar. Policy uncertainty and scrutiny of US debt dynamics also drove traditional safe-haven assets to outperform, particularly the Swiss franc and gold. Rising gold prices improved the terms of trade for certain producers: this both amplified the Swiss franc's gains, making a further gold-price rebound the main risk to CHF-funded strategies, and supported the South African rand. The report had previously believed that, absent a clear decline in energy prices, the rand's carry return relative to volatility was not compelling at current spot levels, but persistently rising gold prices could provide it with more durable support. High-yielding currencies such as HUF, ZAR, and BRL, which had come under pressure in the prior week, also showed relative strength, benefiting from a flatter US curve and lower long-end yields; HUF was additionally supported by a stronger euro. Regarding the Mexican peso, the report characterizes it as offering “less value, but safer carry.” The interest-rate differential between Mexico and the United States is at a historical low, with the 12-month FX carry return at approximately 3%, but MXN's carry return relative to volatility has continued to improve and exceeds that of currencies such as ZAR with similar nominal carry returns. Mexico's terms of trade are less sensitive to energy-price fluctuations than those of South Africa or India, making MXN carry more stable, although it is also less likely to lead when energy prices decline significantly. Because MXN has a high beta to the broad dollar, it may actually lag relatively when the dollar declines broadly, making it an imperfect vehicle for expressing a benign “lower energy, weaker dollar” risk scenario. Nevertheless, under the current complex base case, it can still provide more balanced and stable carry returns, while its high sensitivity to relative US equity strength should also offer support over the medium term. The constraint on MXN is that the report considers it one of the most expensive emerging-market currencies, meaning there may be limited room for substantial spot appreciation, while its current strong level leaves little risk premium against negative shocks. Although USMCA negotiations are a potential source of disruption, Goldman Sachs expects their impact on MXN to be limited because tensions between Mexico and the United States are lower than those between Canada and the United States, and highly integrated supply chains support a more moderate trade outcome. Considering these factors, the report expects the peso to maintain its current strength and lowers its 3-month, 6-month, and 12-month USD/MXN forecasts from 17.75, 18.00, and 18.00 to 16.75, 17.00, and 17.25, respectively. The Canadian dollar's fundamentals have improved at the margin. The United States and Canada have reportedly reached a trade agreement after the US president suspended the 50% tariff on Canada that had been scheduled to take effect on August 19. The proposed agreement not only avoids new tariffs but could reportedly also ease existing tariffs on automobiles, steel, and aluminum. The report had not previously expected the 50% tariff to be implemented ultimately, but a more comprehensive agreement further removes the left-tail risk associated with a US withdrawal from USMCA. This week's movement in USD/CAD appears more like a continued unwinding of overall USMCA trade uncertainty than merely the pricing out of this specific tariff threat. Canada's unemployment rate improved for a third consecutive time, while CPI also surprised to the upside, although the inflation surprise was driven mainly by temporary factors. The Bank of Canada stated that economic growth has finally resumed after stagnating in 2025, mainly because of tariffs, and a further decline in trade-policy uncertainty should strengthen confidence in the recovery. The Canadian dollar still exhibits the characteristics of a funding currency that performs relatively well during US policy volatility and broad dollar weakness. However, with fewer catalysts for renewed domestic deterioration, the Canadian dollar itself should receive support, and the report believes other currencies such as the Swiss franc are now more suitable funding legs. The Turkish lira remains in a policy balancing act. TRY continues along a managed depreciation path, but the monthly pace of depreciation has accelerated slightly to 1.6%-1.8% in recent months. With carry levels broadly unchanged, total monthly returns have slipped to just below 1%. During the early stages of the Iran war and political volatility in late May, the forward market temporarily priced greater depreciation risk. However, because the managed exchange-rate regime remained in place, actual spot performance was better than forward-implied depreciation, temporarily increasing total returns instead. The acceleration in depreciation reflects policymakers' dilemma: declining competitiveness is weighing on exports, core-goods imports remain elevated, and tourism receipts are below seasonal trends, causing the current account and core trade balance to deteriorate gradually. On the other hand, recent underlying inflation has been more favorable, although Goldman Sachs economists still believe their year-end inflation forecast of 29% year over year faces upside risk. The Central Bank of Turkey's FX liquidity, adjusted for effects such as gold valuation, is also recovering toward pre-war levels. Given reserve trends and the recovery in gold prices, the report maintains the view that the managed exchange-rate regime will continue operating, albeit with a slightly faster pace of depreciation, particularly because limiting an increase in domestic dollarization remains a policy priority. However, if energy prices do not decline materially, gold does not rise sharply, and the dollar does not depreciate broadly, risks remain skewed toward faster depreciation as external-imbalance pressures accumulate, election-related noise increases, and foreign investors' TRY positioning approaches pre-war levels. Based on the passage of time and the latest monthly depreciation rate, the report rolls its 3-month, 6-month, and 12-month USD/TRY forecasts from 48, 50, and 54 to 51, 53, and 59. It also extends the target for an equal-weighted long TRY, NGN, and KZT basket against the dollar from 7.5% to 10% and adjusts the stop-loss from 1.5% to 4% to continue accumulating carry returns. High-yielding currencies in Asia excluding Japan lack the carry demand seen in Latin America and Central and Eastern Europe, the Middle East, and Africa because their yields are not particularly high within the broader emerging-market universe, while they also face local headwinds and pressure from energy prices. The Philippines is highly dependent on energy imports, and with Brent crude again above $90 per barrel and subsidies limited, terms-of-trade and inflation pressures will continue to weigh on PHP. The Indonesian rupiah has recently rebounded as succession arrangements for the Bank Indonesia governor have become clearer and the proposed 2027 budget would keep the deficit at 2.4% of GDP. However, the combination of elevated developed-market yields and Indonesian policy driving local yields lower is still expected to push USD/IDR back above 18,000. The report maintains its 3-month, 6-month, and 12-month forecasts of 18,200, 18,300, and 18,500. Regarding India, the report has closed its short THB/INR carry trade with a modest potential gain. The peak in capital-flow pressure on India appears to have passed, and the Reserve Bank of India ended its FCNR(B) program early, but the catalysts for INR appreciation have also faded. The report expects the rupee to become range-bound and slightly raises its 3-month, 6-month, and 12-month USD/INR forecasts from 94, 95, and 96 to 96, 97, and 97. The rationale is that improved capital-account fundamentals are offset by oil-price pressure: preliminary central bank data indicate improved net FDI inflows in the second quarter, FII equity flows have turned into modest net inflows, and bond inflows following the June policy meeting were also substantial. However, the report expects the Reserve Bank of India to use these inflows to reduce its FX forward position or rebuild reserves rather than allow material rupee appreciation. Low-yielding, technology-related Asian currencies have continued their relative strength. Since the start of the Iran war, low-yielding technology-related currencies such as MYR and TWD have consistently outperformed non-technology currencies with high energy-import dependence, including THB, PHP, IDR, and INR, with KRW subsequently joining the leading group. The Korean won significantly lagged in the first half of the year as net capital outflows offset the current-account surplus, but after appreciating 12% against the dollar from July to August, it has become Asia's best-performing currency year to date. Following the correction in semiconductor stocks, equity outflows related to index rebalancing have slowed, while exports continue to exceed expectations. Goldman Sachs economists raised their forecast for South Korea's 2026 current-account surplus to a record $400 billion, equivalent to 19% of GDP, from their 2025 forecast of $123 billion, equivalent to 6.5% of GDP. Given that the won has already appreciated rapidly and surpassed the previous 12-month forecast, the report revises its USD/KRW forecast to a path that still implies appreciation but is more gradual than the recent trend: 1,390 at 3 months, 1,370 at 6 months, and 1,350 at 12 months. USD/TWD and USD/MYR forecasts were also adjusted slightly to reflect recent moves, while the report maintains a constructive view based on their links to technology and AI supply chains. Among low-yielding Asian currencies, the report is most bearish on THB because rising capital-goods imports and energy costs have pushed the current account into deficit, while its real interest-rate differential versus the United States has declined. Finally, the report views the Jackson Hole symposium as an important event for the next phase of FX volatility. The full agenda is expected to be released at 20:00 New York time on Thursday, August 27. Warsh and ECB Executive Board member Schnabel are known to be speaking, while Chilean central bank Governor Rosanna Costa will participate and Reserve Bank of New Zealand Governor Anna Breman will also attend. Warsh will deliver his first keynote address as Fed chair at 10:00 EDT on Friday, August 28, with the text released simultaneously. Because he has not yet indicated whether the speech will discuss the long-term framework or preview policy actions from September through December, uncertainty around the content is high. Moreover, given his reluctance to provide forward guidance, sideline interviews could also become an important source of information for assessing near-term policy. Historically, keynote speeches have generated significant FX volatility, making the conference an explicitly identified near-term monitoring point in the report.

Analysis framework

The report first explains dollar weakness through three channels: US Treasury supply and demand, monetary-policy pricing, and institutional reliability. It then tests this view using cross-asset performance following the Treasury buyback announcement. It subsequently assesses each currency by combining carry return relative to volatility, terms of trade, energy and gold prices, the current account, capital flows, policy management, and valuation constraints to formulate 3-month, 6-month, and 12-month forecasts, before concluding with a review of near-term event risk surrounding the Jackson Hole conference.

Methodology notes

• Macroeconomic frameworkTaylor rule

  Taylor Rule Policy-Rate Comparison

  The report compares the rates implied by certain Taylor rule specifications with the actual policy rate to explain why the market may view current policy as too accommodative and reprice the term premium, yield curve, and exchange rate accordingly.

• Fixed Income and Credit AnalysisYield curve analysis

  US Treasury Curve Shape and FX Transmission

  The report examines the term premium, curve steepening or flattening, and changes in long-end yields to assess how pressure in US Treasuries is transferred to the dollar and to explain the relative performance of high-yielding currencies after the buyback announcement.

• Quantitative/Factor/Portfolio Theory

  Carry Return Relative to Volatility

  This metric evaluates a currency's carry return in conjunction with its volatility risk. On this basis, the report argues that although MXN's absolute carry return is approximately 3%, its return relative to volatility is superior to that of certain currencies with similar yields.

• Macroeconomic framework

  Terms of Trade and Balance of Payments Analysis

  The report examines how energy and gold prices alter the terms of trade for importing countries or producers and combines this with current-account, capital-flow, and reserve changes to assess the direction of currencies including PHP, ZAR, TRY, INR, and KRW.

• Event Game Theory and Behavioral FinanceEvent-driven analysis

  Policy Announcement and Central Bank Meeting Event Analysis

  The report compares the reactions of bonds, the dollar, the Swiss franc, gold, and high-yielding currencies before and after the US Treasury buyback announcement and treats Jackson Hole speeches and interviews as events that could change near-term FX pricing.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• US Dollar (USD)

  Pressure at the long end of the US Treasury market, FOMC communication favoring unchanged rates, and more proactive policy tools jointly make the dollar the adjustment channel.

  Strengths

  Private-sector debt issuance still indicates that investors are optimistic about US return prospects, while officials may adopt a broader macro response during extreme volatility.

  Weaknesses

  A higher term premium, a steeper curve, and questions about institutional reliability weigh on the dollar.

  Comparison

  Current pressure does not yet exhibit all the features seen after “Liberation Day,” when foreign investors reduced demand for US assets and hedging demand surged.

  Risks

  If Warsh and other FOMC members do not respond to recent market signals, the dollar may weaken further.

• Swiss Franc (CHF)

  US policy uncertainty supports its safe-haven performance, while the terms-of-trade effect from rising gold prices further amplifies its gains.

  Strengths

  Traditional safe-haven properties and exposure to a rebound in gold prices.

  Weaknesses

  Following the improvement in Canadian fundamentals, the report believes the Swiss franc may become a more attractive funding leg.

  Comparison

  The Swiss franc led dollar crosses following the Treasury buyback announcement.

  Risks

  A further rise in gold is the primary risk to CHF-funded strategies.

• Mexican Peso (MXN)

  Provides relatively balanced and stable carry returns and is expected to maintain its current strength.

  Strengths

  High carry return relative to volatility, lower sensitivity to energy-price fluctuations, and deeply integrated supply chains with the United States.

  Weaknesses

  It is among what the report calls the most expensive emerging-market currencies, limiting further spot appreciation.

  Comparison

  Compared with ZAR, MXN carry is more resilient to energy-price changes, but it may lag in a scenario of lower energy prices and broad dollar weakness.

  Risks

  Current levels offer little risk premium against negative shocks, while USMCA negotiations remain a potential source of disruption.

• Canadian Dollar (CAD)

  The US-Canada trade agreement and improved domestic data reduce catalysts for renewed weakness, supporting the Canadian dollar.

  Strengths

  Lower trade left-tail risk, consecutive improvements in unemployment, and a return to economic growth.

  Weaknesses

  The upside CPI surprise was driven mainly by temporary factors.

  Comparison

  Compared with the Swiss franc, the Canadian dollar is no longer the report's preferred funding currency.

  Risks

  Implementation of the US-Canada trade agreement and the domestic recovery still require continued confirmation.

• Turkish Lira (TRY)

  It is expected to remain on a managed depreciation path, albeit at a slightly faster pace, while the carry strategy is retained.

  Strengths

  Recovering FX liquidity, the rebound in gold prices, and the managed exchange-rate regime support carry.

  Weaknesses

  Declining export competitiveness, elevated imports, and tourism receipts below seasonal trends are causing the external balance to deteriorate further.

  Comparison

  When the forward market priced excessive depreciation risk, the managed spot path temporarily increased total returns.

  Risks

  Energy prices, external imbalances, election noise, dollarization, and the recovery in foreign positioning could drive faster depreciation.

• Philippine Peso (PHP)

  Its dependence on energy imports subjects it to persistent depreciation pressure within Asian FX.

  Weaknesses

  High exposure to energy imports and limited subsidies.

  Comparison

  It is expected to underperform other Asian currencies, particularly technology-related, low-yielding currencies.

  Risks

  Brent crude remaining above $90 per barrel would worsen the terms of trade and raise inflation.

• Indonesian Rupiah (IDR)

  It has recently rebounded on improved policy-succession and budget information, but the report still expects USD/IDR to rise above 18,000.

  Strengths

  Succession arrangements for the Bank Indonesia governor are clearer, and the 2027 budget plan would limit the deficit to 2.4% of GDP.

  Weaknesses

  Domestic policy is pushing yields lower while developed-market yields remain high.

  Comparison

  Compared with technology-related, low-yielding Asian currencies, IDR faces greater energy and interest-rate differential pressures.

  Risks

  Diverging yield directions between developed markets and Indonesia could renew capital pressure.

• Indian Rupee (INR)

  The peak in capital-flow pressure has passed, but appreciation catalysts have faded, and the currency is expected to remain range-bound.

  Strengths

  Net FDI, equity inflows, and bond inflows all show signs of improvement.

  Weaknesses

  Oil-price pressure offsets the improvement in the capital account, while the central bank is inclined to use inflows to rebuild reserves rather than permit material appreciation.

  Comparison

  The report has closed its short THB/INR carry trade.

  Risks

  A renewed rise in energy prices could weaken the terms of trade and currency performance.

• Korean Won (KRW)

  Technology exports, easing capital outflows, and a record current-account forecast support continued appreciation.

  Strengths

  Exports are exceeding expectations, and the 2026 current-account forecast reaches $400 billion, or 19% of GDP.

  Weaknesses

  Recent appreciation has been rapid, and the forecast path is more gradual than the July-to-August trend.

  Comparison

  It shifted from significantly lagging in the first half to becoming Asia's best-performing currency year to date.

  Risks

  Capital flows related to semiconductor stocks and index rebalancing may still cause volatility.

• New Taiwan Dollar and Malaysian Ringgit (TWD, MYR)

  Their links to technology and AI supply chains support a constructive outlook among low-yielding Asian currencies.

  Strengths

  Exposure to technology exports and AI supply chains.

  Weaknesses

  The report makes only slight forecast adjustments based on recent moves and provides no new specific figures.

  Comparison

  They have outperformed energy-import-dependent currencies such as THB, PHP, IDR, and INR since the Iran war.

  Risks

  Changes in the technology cycle and related capital flows could affect relative performance.

• Thai Baht (THB)

  The report is most bearish on it among low-yielding Asian currencies.

  Weaknesses

  The current account has moved into deficit because of rising capital-goods imports and energy costs, while the real interest-rate differential versus the United States has declined.

  Comparison

  It is weaker than technology-related, low-yielding currencies such as KRW, TWD, and MYR.

  Risks

  Energy costs, the current-account deficit, and continued narrowing of the real interest-rate differential.

Key data

• USD/MXN Forecast16.75, 17.00, 17.25For 3 months, 6 months, and 12 months, respectively; previously 17.75, 18.00, and 18.00
• MXN 12-Month FX Carry ReturnApproximately 3%The Mexico-US interest-rate differential is at a historical low, but carry return relative to volatility has improved
• USD/TRY Forecast51, 53, 59For 3 months, 6 months, and 12 months, respectively; previously 48, 50, and 54
• TRY Monthly Depreciation Rate1.6%-1.8%Average level in recent months; total monthly returns have slipped to just below 1%
• Turkey Year-End Inflation Forecast29% year over yearGoldman Sachs economists believe this forecast still faces upside risk
• Equal-Weighted Long TRY, NGN, and KZT Basket Target10%Previously 7.5%; the stop-loss was adjusted from 1.5% to 4%
• Brent Crude PriceAbove $90 per barrelThe report believes high oil prices will continue to weigh on PHP through the terms of trade and inflation
• Indonesia's Planned 2027 Budget Deficit2.4% of GDPProvides some fundamental support for the recent IDR rebound
• USD/IDR Forecast18,200, 18,300, 18,500For 3 months, 6 months, and 12 months, respectively
• USD/INR Forecast96, 97, 97For 3 months, 6 months, and 12 months, respectively; previously 94, 95, and 96
• Korean Won Appreciation from July to August12% against the dollarThe Korean won shifted from lagging in the first half to becoming Asia's best-performing currency year to date
• South Korea 2026 Current-Account Forecast$400 billion, or 19% of GDPThe previous 2025 forecast was $123 billion, or 6.5% of GDP
• USD/KRW Forecast1,390, 1,370, 1,350For 3 months, 6 months, and 12 months, respectively, maintaining appreciation but at a more gradual pace than the recent trend
• Proposed Suspension of Canadian Tariff50%Originally scheduled to take effect on August 19, 2026; the United States and Canada reportedly subsequently reached a broader trade agreement
• Jackson Hole Keynote AddressAugust 28, 2026, 10:00 EDTWarsh will deliver the keynote address, with the text released simultaneously

Impact & implications

The report believes the dollar may continue to bear the adjustment pressure from long-end US Treasuries and US policy uncertainty, but the degree to which non-dollar currencies benefit will vary considerably. Rising gold prices favor the Swiss franc and currencies of certain gold-producing countries, while rising energy prices weigh on the currencies of importers such as the Philippines and India. Technology exports and current-account improvements support KRW, TWD, and MYR, while external imbalances, real interest-rate differentials, and policy-management constraints continue to limit TRY, THB, IDR, and INR. Near-term market pricing may also experience significant volatility in response to Fed policy signals from Jackson Hole.

Risks

• If FOMC officials do not express concern about market signals such as the term premium, yield curve, and dollar, the dollar may weaken further.
• Continued increases in gold prices could amplify Swiss franc strength and pose a risk to CHF-funded strategies.
• MXN is highly valued and lacks a premium against negative shocks, while USMCA negotiations could still cause disruption.
• TRY faces a deteriorating external balance, election-related noise, recovering foreign positioning, and domestic dollarization pressure, potentially accelerating its depreciation.
• Persistently high energy prices will continue to weigh on PHP, INR, and other Asian currencies highly dependent on energy imports.
• High developed-market yields and declining Indonesian domestic yields could push USD/IDR back above 18,000.
• THB faces the dual pressure of a current-account deficit and a declining real interest-rate differential versus the United States.
• The Jackson Hole keynote address and sideline interviews could trigger significant FX volatility.

What to watch

• Monitor whether Chair Warsh and other FOMC participants respond to recent signals from the term premium, yield curve, and dollar weakness.
• Track US Treasury buyback policy, long-end US Treasury yields, and whether related pressure continues to shift to the dollar.
• Watch the divergent impact of gold and energy prices on the terms of trade for CHF, ZAR, PHP, INR, and TRY.
• Track the effects of the US-Canada trade agreement and USMCA negotiations on the risk premiums of CAD and MXN.
• Monitor Turkey's current account, core trade balance, FX liquidity, domestic dollarization, foreign positioning, and election-related noise.
• Track whether Asian technology exports, semiconductor-related fund flows, and South Korea's current account continue to support KRW, TWD, and MYR.
• Watch for the full Jackson Hole agenda released on August 27, Warsh's keynote address on August 28, and sideline interviews during the conference.