US Dollar: Softer bias with pro-risk flows – ING

ING’s Chris Turner, Francesco Pesole and Frantisek Taborsky argue that recent US Treasury buy-backs are primarily a signalling tool against high yields, pointing to a softer Dollar in a risk-friendly environment. They see DXY capped below 99.00, with high-beta commodity and emerging market currencies likely to outperform, while warning that a sharp sell-off in Treasuries and equities would revive safe-haven FX demand.

Treasury signalling points to softer Dollar

"Many commentators seem to be treating this week's US Treasury intervention in bond markets as a heinous financial crime. We prefer to take the view offered by a former US Treasury official interviewed in the Financial Times today that this was a signalling exercise. Yes, these buy-back operations were originally designed to address market liquidity issues and the off-cycle nature of the adjustment has raised eyebrows."

"But the main takeaway has to be that higher longer-dated Treasury yields are firmly on the Treasury's radar and need to be addressed. US Treasury Secretary Scott Bessent suggested yesterday that there might be some new fiscal consolidation plans incoming. These could centre on a task force to cut back on fraud in the same way that Elon Musk's DOGE tried to cut back on government spending."

"For the dollar, quite a few are comparing this week's Treasury buybacks to President Donald Trump's 'Liberation Day' tariffs and concluding this again undermines US policy credibility. During that period in April 2025, the Swiss franc, the euro and the yen led the charge against a weaker dollar. We see this week's developments less as a policy credibility story and more as a soft dollar, pro-risk story if the US Treasury is taking a greater interest in protecting the long end."

"That probably means a gentler dollar decline and some outperformance of high-beta commodity currencies and emerging market currencies in general. If we're wrong and Treasuries and equities start selling off hard, then the story would revert to a lower USD/CHF, higher EUR/USD and high-yield FX selling off as volatility rises."

"On today's US calendar are the S&P PMI readings for August – all expecting continued expansion in activity. DXY has support in this 98.65/70 region and will probably struggle to make it back above 99.00 now."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)