The US dollar index is trading in a narrow range during the Asian session on Monday, hovering around 98.80 and staying close to its three-month low.

The Treasury's expanded long-term debt buyback program has sparked concerns over the deterioration of US fiscal conditions, while Treasury Secretary Bessent's efforts to suppress yields have inadvertently undermined the greenback. Market pricing for a September rate hike has slipped to 41% from 47% a month ago. Additionally, some Federal Reserve officials have indicated the need for more evidence of inflation cooling, keeping the policy trajectory uncertain. On the geopolitical front, Bessent is scheduled to hold a press conference on Monday to unveil what has been described as the "harshest ever" sanctions against Iran, with escalating tensions in the Middle East potentially providing safe-haven support for the dollar.

Fiscal Worries Weigh on Dollar Amid Treasury Buyback Concerns

The dollar index remains pinned near its three-month low. Treasury Secretary Bessent announced last week that the department would double its long-term bond buyback operations to $4 billion per auction in an effort to curb the surge in 30-year yields. This announcement followed a surprise commitment by the Treasury to at least double its long-dated debt repurchase program, aimed at suppressing bond yields. The market has interpreted this as a signal of proactive intervention by fiscal authorities in long-end rates, but the actual effect has triggered broader credit concerns.

A chief market strategist at Bannockburn Global Forex noted: "Bessent's efforts to suppress US yields haven't done much for Treasury rates, but they have weakened the dollar." He added: "The market is pushing back." This assessment precisely captures the core dilemma facing the dollar — the Treasury's intervention has failed to effectively lower long-end yields while simultaneously eroding market confidence in US creditworthiness and fiscal discipline. Investors are beginning to question the sustainability of US debt, prompting capital outflows from dollar-denominated assets and intensifying depreciation pressure on the greenback, with short-term technical indicators also showing clear signs of weakness.

Rate Hike Expectations Cool, But Fed Divisions Persist

Recent US inflation data has shown signs of moderation, yet some Fed officials maintain that more evidence of easing price pressures is required. According to the CME FedWatch tool, market odds for a 25-basis-point rate hike in September have declined to 41% from 47% a month earlier. This trend caps the dollar's upside potential, though internal policy divisions at the Fed keep the rate path uncertain. Some officials emphasize that the inflation pullback remains insufficiently robust and advocate for maintaining a restrictive stance for longer; others focus on growth and employment risks, hinting at the possibility of an earlier shift toward easing. This divergence has led to frequent fluctuations in market pricing of the future rate trajectory, making it difficult for the dollar to establish a sustained directional trend.

Traders broadly believe that until more key data emerges, the dollar will continue to oscillate between policy expectations and actual economic performance. Short-term upward momentum remains constrained, while any unexpectedly hawkish rhetoric could provide a temporary boost to the currency.

Geopolitical Factors: Iran Sanctions Announcement Could Spur Safe-Haven Demand

Bessent is set to hold a press conference on Monday to unveil the previously flagged "harshest ever" sanctions against Iran. Last week, President Trump announced that the US would impose its "most severe economic actions" on Iran, describing them as "unprecedented economic warfare and isolation," with countries providing financial assistance to Iran facing serious economic consequences. Escalating tensions in the Middle East could provide safe-haven buying support for the dollar in the near term.

Market expectations suggest that the new round of sanctions will further restrict Iran's oil exports and financial channels, heightening energy price volatility risks and amplifying regional geopolitical uncertainty. In such an environment, the dollar's traditional safe-haven attributes could resurface, attracting capital back into US assets. However, should the sanctions trigger broader supply chain disruptions or a sharp decline in global risk appetite, the dollar's support could be limited by the dual drag of current fiscal concerns and cooling rate hike expectations. The ultimate impact will depend on actual market reactions.

Institutional Views: Fiscal Concerns Continue to Pressure the Dollar

Strategists at Scotiabank believe the current policy mix leaves the dollar particularly vulnerable to fiscal worries. They point out that "efforts to suppress long-end yields mean the dollar will bear a greater negative fiscal burden," reinforcing the view that the greenback may remain under pressure while fiscal uncertainty persists.

St. Louis Fed President Musalem delivered a relatively hawkish speech, noting that monetary policy is "neutral or mildly accommodative" while warning that core inflation remains stuck in the 2.5%-3% range. He suggested that current rate levels make it less likely for inflation to return to the 2% target, and hinted that raising rates now could avoid the need for more aggressive action later. This stance provides modest support for the dollar and Treasury yields.

Summary and Outlook

The dollar index is currently trading around 98.80, hovering not far above its three-month low. The Treasury's expanded buyback program has fueled concerns about deteriorating US fiscal conditions, with Bessent's yield-suppression efforts "weakening the dollar." The probability of a September rate hike has dropped from 47% to 41%, though divisions persist within the Fed. Bessent will announce the "harshest ever" sanctions against Iran on Monday, and escalating Middle East tensions could offer safe-haven support for the dollar. Scotiabank argues the dollar will bear a greater negative fiscal burden; Musalem's hawkish remarks suggest that preemptive rate hikes could prevent larger moves later. In the near term, the dollar may maintain a weak bias, though geopolitical risks could limit its downside.