Global investors are once again becoming wary of the outlook for dollar-denominated assets. During August, the U.S. currency weakened for a second consecutive month, marking its fifth monthly decline in the first eight months of the year. A faster U.S. Treasury buyback plan and coordinated intervention with Japan to support the yen have reignited concerns about the greenback's prospects, with some speculating that the current administration may favor a softer dollar. Meanwhile, despite a surprisingly hawkish tone from Federal Reserve Chair Warsh at the Jackson Hole symposium that briefly lifted the dollar, uncertainty remains over whether the Fed will deliver on market expectations for another rate hike. The dollar now finds itself caught between conflicting monetary and fiscal policy signals, with Wall Street anticipating further downside in September.
Data from financial media shows that the Bloomberg Dollar Spot Index fell 0.9% in August, following a 1.3% decline in July, marking the longest consecutive monthly losing streak since February this year. A key factor pressuring the dollar last month was Treasury Secretary Bessent's more aggressive debt management approach. Earlier in the month, Bessent announced plans to expand the scale of Treasury buybacks, with individual auctions potentially exceeding $4 billion, a move that prompted hedge funds, asset managers, and other speculative investors to trim their long-dollar positions.
On August 31, Bessent further stated that he and Fed Chair Warsh are "aligned" on bond issues, drawing renewed attention to the interplay between fiscal and monetary policy. Erik Nelson, strategist at Wells Fargo, noted that Warsh's reiteration of the Fed's inflation target last week helped ease concerns about policy credibility. However, Bessent's reaffirmation of a more interventionist policy style adds another layer of policy risk for the dollar. On August 31, the dollar slipped about 0.2%, partially giving back gains from the prior Friday.
Even the rate-hike expectations that could favor the dollar remain clouded by uncertainty. Last Friday, Warsh's Jackson Hole debut proved more hawkish than expected, significantly boosting odds of a September rate increase. Traders now price in a greater than 50% probability of a September hike, while also increasing bets on further tightening later this year. However, opinions remain divided on whether those expectations will actually materialize. U.S. inflation has now exceeded the Fed's 2% target for five consecutive years.
Manulife Fund noted in a report that Warsh's latest remarks corrected previously ambiguous guidance. While the short-term hawkish signal triggered a modest market pullback, it has to some extent restored medium- and long-term confidence in the Fed. Based on Warsh's comments on economic resilience, the non-restrictive financial environment, and sticky inflation, combined with geopolitical and oil price tail risks, the probability of a September hike is rising, though the exact timing depends on incoming data. Frederik Ducrozet, Head of Macro Research and Strategy at Pictet Wealth Management, told reporters that Warsh's remarks still reflect a cautiously hawkish stance, suggesting the Fed may need to act further if inflation fails to return to target.
Of greater note, Ducrozet said, is Warsh's view that current financial conditions may not yet be sufficiently restrictive. "That statement was more direct than we originally expected. But these hawkish comments could also be interpreted another way: as other core FOMC members continue to lean hawkish, Warsh might be concerned about being marginalized or losing influence within the committee," he said. "Our base case remains that the Fed holds rates steady. However, Warsh's remarks did send a new signal that a modest upside surprise in CPI and/or employment data would be enough to tip the policy balance toward a hike."
David Chao, Global Market Strategist for Asia-Pacific at Invesco, also analyzed that the key takeaway from Warsh's Jackson Hole speech is that the Fed remains firmly focused on bringing inflation down to its 2% target. He expressed confidence in the broader U.S. economy. The combination of resilient growth and sticky inflation explains why markets quickly repriced the likelihood of further hikes, leading to higher Treasury yields and a stronger dollar.
"Although rate-hike expectations have increased, a September hike is not yet a done deal. Warsh still wants to reduce reliance on forward guidance, so he did not explicitly signal a September move. Upcoming inflation and labor market data will be crucial," Chao added. Nelson also expects that the Fed will likely be unable to deliver the full extent of tightening that markets have already priced in. As traders unwind their rate-hike bets, Treasury yields and the dollar could face renewed repricing pressure in September.
Even with firmer rate-hike expectations, the dollar is caught in an environment of conflicting fiscal and monetary policy signals. Bessent's expanded Treasury buybacks have revived concerns that the administration may favor a weaker dollar, while Warsh's hawkish stance bolsters rate-hike expectations and supports the greenback. Whether upcoming U.S. employment and inflation data can justify current market pricing will be a key determinant of the dollar's trajectory in September. Dollar volatility has also risen alongside market divergence, with the one-month implied volatility index moving higher over the past two trading sessions, indicating traders are preparing for potentially larger currency swings in the coming weeks.
Meanwhile, the MSCI emerging markets equity benchmark index rose 3.3% in August, its best August performance since 2004. The "weak dollar trade" and the broadening effect of the artificial intelligence (AI) boom have jointly fueled the rally. This trade refers to investors betting that the U.S. will allow the dollar's purchasing power to gradually decline to relieve debt and deficit pressures. Hasnain Malik, Head of Emerging Markets Equities and Geopolitical Strategy at Tellimer, said that U.S. fiscal and debt concerns have prompted a fresh wave of capital inflows into emerging markets, substantively supporting local-currency assets. Stabilizing investor sentiment toward AI tech leaders has also boosted emerging market assets and gold prices.
The emerging market currency index also rose for a second consecutive month in August, on track for its best quarterly performance since June 2025. The Korean won and South African rand were among the best performers last month. Supriya Menon, Multi-Asset Fund Manager at Wellington Management, told reporters that the current environment remains supportive of global equities, with corporate earnings driving performance while liquidity and fundamentals help offset geopolitical uncertainties. Emerging market equity valuations are near their most attractive levels in a decade, and Menon continues to favor emerging market stocks over European equities, while maintaining a neutral view on U.S. and Japanese stocks.
Menon also expressed a positive outlook for emerging market bonds. "Fundamentals in emerging markets are at their strongest levels in ten years. Countries across all credit tiers, after years of reform, are seeing sustained rating upgrades, increased resilience, and fewer defaults. This means emerging market bonds have evolved significantly, yet many investors still view them through the lens of past cycles. That perception has become disconnected from reality and needs to be reassessed," he said.
Amid heightened global uncertainty, many emerging market economies have further strengthened their fiscal positions, built up reserve buffers, and optimized debt structures. Countries such as Ecuador, Egypt, El Salvador, and Argentina have maintained primary fiscal balances roughly 3 percentage points of GDP above their long-term averages. Debt restructurings in Ghana and Sri Lanka have also pushed those sovereigns to pursue further reforms that consolidate macroeconomic stability. Many emerging market central banks have strengthened policy credibility, with some having tightened policy ahead of developed-market central banks as early as 2022. South Africa has lowered its inflation target to 3%, aligning with developed-market standards, while its fiscal and structural reforms have further enhanced credibility.
Post-election governance changes also mean that fiscally lagging countries like Hungary and Colombia could implement meaningful fiscal consolidation, creating room for further monetary easing. Geopolitical realignment is also delivering dividends to many emerging markets, with abundant commodity resources - particularly critical metals needed for semiconductors and AI industries - boosting export growth. "Improvements across all facets of fundamentals, combined with attractive yield potential and diversification value against developed-market risks, warrant a reassessment of emerging market bonds by global investors," Menon concluded.
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