Dollar struggles for traction as markets weigh Iran sanctions, Treasury buybacks

The U.S. dollar showed weakness against major currencies on Tuesday, as markets absorbed news of expanded Iran sanctions and potential Treasury buybacks of longer-dated bonds. The euro edged higher, nearing a three-month high, while sterling also strengthened, approaching a six-month peak.

U.S. Treasury Secretary Scott Bessent announced an increase in sanctions against Iran, warning nations to cease business ties or face exclusion from the dollar-based financial system. This move could potentially reverse recent dollar declines, as some investors might buy dollars to avoid sanctions.

The Canadian dollar remained flat after a prior session's dip, amid U.S. threats of increased tariffs on Canadian goods following collapsed trade talks. The Japanese yen saw a slight strengthening.

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That potentially is one source of a slight reversal of the dollar weakness that we had at the end of last week.

Treasury markets found some support from reports that the U.S. Treasury might use its cash balance to buy back longer-dated bonds, aiming to reduce borrowing costs. This follows a previous announcement to double quarterly repurchases of these bonds. However, the impact on yields was limited, with the 2-year and 10-year Treasury yields showing little change.

Market participants are also anticipating Federal Reserve Chair Kevin Warsh's speech at Jackson Hole, Wyoming. Investors are seeking insights into the recent rise in bond yields and reassurances about the Fed's independence.

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The suggestion being that, maybe if you're going to be sanctioned and you're not going to have access to U.S. dollars, then you better buy some dollars first before that happens.