Greenback on its back foot as markets lean into a September pivot

The dollar spent the final session of August treading water after a month that saw it steadily lose altitude. The catalyst wasn’t a growth scare or a surge in foreign data—it was the drumbeat of easier-policy expectations in the United States. With traders assigning high odds to a quarter-point cut at the Fed’s September meeting, the greenback surrendered ground across most of the G10 and lined up a monthly decline of about two percent.
You could see the shift in the usual bellwethers. The euro held near $1.17, sterling hovered in the mid-$1.34s, and even the yen found firmer footing as U.S. two-year yields inched lower. None of the moves were dramatic; all of them leaned the same way. As the front end of the Treasury curve softened, the currency that rides it most closely did, too. A month ago, investors were still debating whether the Fed would wait for more proof on inflation. This week, a top policymaker said outright that he wants to begin cutting in September—enough to keep dollar buyers cautious as they waited for Friday’s inflation report.
That report, the core PCE index, holds the key to whether the new consensus sticks. The market’s preferred outcome is a “cool-but-not-cold” print that nudges annual inflation below three percent while showing that real consumer spending remains sturdy. That combination would bolster the case for an insurance cut that protects growth without reigniting price pressures—and it would likely extend the dollar’s slump into month-end. A hotter core or outsized nominal spending, by contrast, would stiffen the front end and hand the dollar a late reprieve before next week’s jobs data.
A political wrinkle complicated the backdrop without redefining it. The administration’s attempt to oust a Fed governor—now in court—added a sliver of risk to the Fed’s communications channel and dented the greenback’s safety aura at the margin. The curve told the tale: short maturities eased on cut bets; long bonds retained a small premium for policy noise and fiscal worries. With real yields capped, traditional hedges such as gold had an easier time in August, while equities took their cues from the rates path and from company-specific stories rather than from the dollar.
For FX desks, the playbook into September is straightforward. If the data keep edging in the right direction and Fed rhetoric stays measured, dips in high-carry or undervalued peers to the dollar will find sponsors, and rallies in the greenback will be sold. If the numbers or the politics break the pattern—say, a sticky inflation surprise or a louder fight over central-bank independence—the dollar can recover quickly. Either way, August delivered a clear message: the currency that surged on U.S. exceptionalism is now tethered to a different narrative, one in which “easier soon” matters more than “higher for longer.”