EUR/USD: Almost back at the top of the range

The euro continues to gain ground against the dollar, now trading around $1.17 - its highest level in several months. This movement reflects less a sharp surge in the single currency than a gradual weakening of the greenback, which is being weighed down by growing concerns over US debt, rising long-term interest rates, and questions regarding Federal Reserve policy.

The primary point of tension currently lies in the US bond market. The yield on the 10-year Treasury note is hovering around 4.65%, while the 30-year yield has surpassed 5.20%. These levels reflect growing investor skepticism regarding the United States' fiscal trajectory.

US federal debt has just topped $40 trillion, while the budget deficit remains above 6% of GDP. Interest payments alone are projected to reach approximately $1.2 trillion this year. Against this backdrop, investors are demanding higher returns to hold long-term US debt.

Typically, a rise in US yields supports the dollar by making dollar-denominated assets more attractive. However, this dynamic is less effective when the rate hike stems primarily from fears regarding debt, public deficits, and the sustainability of federal finances. US rates are rising, then, but for reasons that are not necessarily positive for the greenback.

The situation has prompted the US Treasury to intervene. Washington announced it would double its long-term debt buybacks, purchasing at least $4 billion per operation across specific maturities ranging from 10 to 30 years. The goal is to improve market liquidity and curb upward pressure on yields.

However, the relief was short-lived. After an initial easing, rates quickly resumed their upward climb. The market takes the view that while these interventions may temporarily ease tensions, they do not resolve underlying issues: high debt levels, persistent deficits, massive financing needs, and inflation that remains above the Fed's target.

For the dollar, the signal is therefore negative. If US authorities seek to contain yields while fiscal imbalances persist, some of the adjustment may be reflected in the currency. This is currently contributing to the greenback's weakness and the concurrent rebound in gold, Bitcoin, and several major currencies.

The Federal Reserve is also adding to the uncertainty. Minutes from the July meeting revealed that several members remain concerned about persistent inflation. Some are prepared to raise rates again if price pressures do not move sufficiently toward the 2% target.

Markets currently price the probability of a rate hike in September at around 35%, with a significantly higher probability by December. The Fed thus maintains a relatively hawkish bias, yet the lack of clarity regarding the monetary policy path limits the support typically provided to the dollar.

Investors are now awaiting upcoming remarks from Kevin Warsh, particularly at Jackson Hole. The Fed Chair will need to clarify how he intends to balance persistently high inflation, already elevated long-term rates, and an economy beginning to show mixed signals.

Walmart's results, in particular, have reignited concerns regarding US consumer spending. US comparable sales rose by 2.5%, falling short of the expected 3.6%. While this figure is not enough to undermine the overall strength of the US economy, it indicates that households are increasingly feeling the impact of high prices and restrictive financial conditions.

Another key factor is oil. Brent crude is trading around $92 a barrel amidst persistent tensions between the United States and Iran and disruptions around the Strait of Hormuz. Sustained high energy prices could fuel inflation and further complicate the Fed's task.

The paradox is significant. Higher inflation could prompt the Fed to keep interest rates high, which should theoretically support the dollar. At the same time, however, high rates sharply increase the cost of servicing an already massive public debt. The market must therefore weigh potential monetary support for the dollar against a worsening perception of US fiscal risk.

In contrast, the situation in the EU appears relatively clearer. Yields are also rising in the eurozone - with the 10-year German Bund hovering around 3.25% - but tax imbalances are generally less severe across the region.