Good morning and welcome back. The US dollar is struggling to climb off a three-month low as traders digest last week’s Treasury buyback announcement and the breakdown in US-Canada trade negotiations, and await Friday’s speech from Federal Reserve chair Kevin Warsh at Jackson Hole. Treasury yields are holding steady, equity futures are pointing to modest gains at the open, and the euro, pound, yen, and Swiss franc are all marginally softer—but still up solidly relative to a week ago.

The dollar tumbled last week when Treasury Secretary Scott Bessent said his department would “at least” double its purchases of long-term government debt from next month. Despite his protestations, there was little evidence of a malfunctioning in markets or abnormal liquidity conditions in Treasuries, and the move instead appeared aimed at reversing the sell-off in ten- and thirty-year bonds that had driven American borrowing costs to multi-decade highs.

Yields have been climbing for several reasons. The artificial-intelligence boom is drawing money into shares rather than bonds, and the hyperscaler technology firms are competing with sovereign issuers as they ramp up their own borrowing. The global economy is fragmenting, with military alliances crumbling, trade barriers rising, and capital flows growing more complicated. Investors are worried about the Federal Reserve’s independence. Most advanced economies are carrying unprecedented debt loads. And US fiscal policy is on an exceptionally unsustainable path, with the government running vast deficits despite very low unemployment.

There is no sign of fiscal conservatism on either side of the aisle. Lower taxes, higher spending (driven largely by healthcare and defence), and rising interest costs are forcing the Treasury to borrow ever more from increasingly reluctant markets, with little to suggest that politicians are set to take the issue seriously any time soon. Absent a fiscal consolidation, either yields must rise or the dollar must fall, and Bessent’s actions point to an administration intent on engineering the latter.

The Canadian dollar gapped almost 65 pips weaker at last night’s Asian open and remains on the defensive after US-Canada trade talks collapsed on Friday night and Washington implemented 50% tariffs on roughly $20bn in Canadian goods. Prime Minister Mark Carney pledged to match the levies “dollar for dollar”, with Canada’s counter-tariffs due to take effect after Labour Day.

The direct hit to exports should be manageable. The tariffs cover a relatively small share of overall trade; energy, potash and critical minerals are exempt; most cross-border goods will still move duty-free under the USMCA agreement; and commodity prices remain high. But the duties could prove devastating for thousands of small and medium-sized firms that sell mainly into the US, and will raise economic uncertainty once again—threatening to derail a nascent recovery and cap the loonie’s gains.

There is considerable uncertainty around what Kevin Warsh will say when he delivers his first Jackson Hole keynote as chair on Friday morning.

The speech may prove a damp squib. Since taking office in May he has curtailed forward guidance at every turn, trimmed the statement, and kept press conferences deliberately opaque, and this year’s theme—“Financial Innovation: Implications for Payments and Policy”—may give him cover to stay above the fray. Data released on Wednesday are expected to show the Fed’s preferred inflation measure—the core personal consumption expenditures index—rising 0.21% in July, up 3.26% over the prior year but down from the previous month, consistent with the generalised cooling in activity seen across recent data releases.

But the dollar could also find some relief. Inflation risks remain tilted to the upside: the war against Iran looks set to grind into a seventh month, spending on artificial intelligence continues to ramp up, and the Trump administration is seeking to impose higher tariffs across a wide range of imports. Warsh could seize the opportunity to tilt against dovish interpretations, seeking to dispel some of the uncertainty sown during his last press conference—which he is said to regard as a misstep—by more forcefully reinforcing the Fed’s commitment to returning inflation to the 2% target over time. If so, near-term monetary tightening expectations could firm, widening rate differentials in the greenback’s favour.