Currency markets remained volatile in August as geopolitical tensions, central bank policy and government intervention continued to influence exchange rates.
The Japanese yen was a key focus after the US and Japan intervened jointly in currency markets at the end of July. The intervention initially pushed the yen higher, but much of the move was later reversed as underlying differences in interest rates remained unresolved.
The yen ended August broadly unchanged against the US dollar, with markets continuing to assess the possibility of further action from Japanese authorities. Expectations of a potential Bank of Japan rate increase also remained a factor in the outlook for the currency.
Geopolitical tensions continued to influence markets during the month. The conflict between the US and Iran remained unresolved, with restrictions around the Strait of Hormuz creating ongoing concerns about global energy supplies.
Oil prices remained elevated at around $90 to $100 a barrel, keeping pressure on inflation expectations. The impact was particularly visible in government bond markets, with UK gilt yields reaching their highest level since 1998 by the end of August.
The geopolitical situation also supported demand for traditional safe-haven currencies such as the Japanese yen and Swiss franc during periods of heightened uncertainty.
US government policy was another major influence on financial markets. Rising long-term Treasury yields, persistent inflation and increased corporate debt issuance led the US Treasury to increase its programme of Treasury buybacks during August.
The larger buyback operations initially pushed long-term Treasury yields lower, but the move was short-lived as concerns about market liquidity and the effectiveness of the approach returned.
The Federal Reserve remained under pressure as it considered the outlook for inflation and interest rates.
New Fed Chair Kevin Warsh used his speech at the Jackson Hole symposium to emphasise the importance of controlling inflation. He argued that core inflation remained too high and indicated that future monetary policy would be driven by incoming economic data rather than detailed forward guidance.
The comments led markets to increase expectations of a September rate increase, providing some support for the US dollar towards the end of August.
Questions surrounding the independence of the Federal Reserve also remained in focus following renewed attempts by the US administration to remove Governor Lisa Cook. Cook denied the allegations against her and said she would challenge the move.
The combination of inflation concerns, political pressure and uncertainty over monetary policy created an additional source of volatility for the dollar and other major currencies.
In the UK, the Bank of England continued to assess the balance between inflation and economic growth. Governor Andrew Bailey indicated that the risk of second-round inflation effects remained limited ahead of the Bank’s September policy meeting.
Overall, currency markets remained driven by a combination of geopolitical developments, interest-rate expectations and government intervention.
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