Forex Today: US Dollar struggles after Treasury boosts long-term bond purchases
Here is what you need to know on Thursday, August 20:
The US Dollar (USD) came under heavy selling pressure in the American session on Wednesday after the Treasury Department unexpectedly announced that it will double the size of some long-dated debt buyback operations to support market liquidity. In the European morning on Thursday, market participants digest the implications of this development and await mid-tier macroeconomic data releases from the US, including weekly Initial Jobless Claims and Philadelphia Fed Manufacturing Survey for August.
US Dollar Price This week
The table below shows the percentage change of US Dollar (USD) against listed major currencies this week. US Dollar was the weakest against the Swiss Franc.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | -1.02% | -0.65% | -0.52% | -0.62% | -0.45% | -1.03% | -1.61% | |
| EUR | 1.02% | 0.52% | 0.50% | 0.40% | 0.53% | -0.01% | -0.59% | |
| GBP | 0.65% | -0.52% | 0.04% | -0.12% | 0.01% | -0.53% | -1.16% | |
| JPY | 0.52% | -0.50% | -0.04% | -0.09% | 0.02% | -0.52% | -1.11% | |
| CAD | 0.62% | -0.40% | 0.12% | 0.09% | 0.12% | -0.43% | -1.04% | |
| AUD | 0.45% | -0.53% | -0.01% | -0.02% | -0.12% | -0.54% | -1.16% | |
| NZD | 1.03% | 0.01% | 0.53% | 0.52% | 0.43% | 0.54% | -0.64% | |
| CHF | 1.61% | 0.59% | 1.16% | 1.11% | 1.04% | 1.16% | 0.64% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).
The yield on 30-year US Treasury bond, which hit its highest level in 19 years on Tuesday, declined sharply and fell nearly 2% on Wednesday, while the yield on the 10-year reference declined 1.4%. In turn, the USD Index fell 0.9% and touched its lowest level in nearly three months below 99.00. In the European morning on Thursday, the USD Index holds steady at around 98.80.
In the meantime, the minutes of the Federal Reserve's (Fed) July policy meeting showed late Wednesday that many participants judged higher rates would likely be necessary if inflation fails to decline, while a few opted out for an immediate hike, saying it could avoid the need for further increases later.
US Dollar faces policy headwinds but retains defensive appeal
Deutsche Bank’s George Saravelos argues that the latest buyback initiative amounts to a “soft-form financial repression policy aimed at containing the long-end of the US yield curve,” and warns this is “negative for the Dollar.” His case, Deutsche Bank notes, is that “if the market price of US Treasuries isn’t ‘allowed’ to adjust lower, then the foreign exchange price of Treasuries owned by foreign investors has to adjust via a weaker Dollar.”
BNY’s strategists acknowledge a “growing list of Dollar-negative catalysts – from the July FOMC to renewed concerns around US fiscal policy and real-rate support” but caution that history “argues against being aggressively short the greenback as a portfolio hedge.” They highlight that in periods when “bonds and equities sell off together, particularly around supply-driven inflation shocks, the USD has remained the most reliable source of protection,” while traditional “quality” currencies have delivered only “inconsistent relative resilience.”
Late Wednesday, US President Donad Trump announced that they will launch an unprecedented "crushing economic operation" against Iran and warned that any countries offering support to Iran will also face severe financial retaliation. In response, Iranian Foreign Minister Abbas Araghchi said that this decision by Trump would only bring further defeat to Washington. Crude Oil prices hold steady early Thursday, with the barrel of West Texas Intermediate (WTI) trading in a tight channel at around $84.50 in the European morning.
EUR/USD gained more than 0.8% on Wednesday and continued to stretch higher during the Asian trading hours on Thursday, touching a fresh three-month peak in the process. In the European morning, the pair stays in a consolidation phase below 1.1700.
GBP/USD trades at its highest level since early May above 1.3600 early Thursday following Wednesday's upsurge.
USD/JPY declined nearly 1% on Wednesday before staging a modest rebound early Thursday. At the time of press, the pair was trading slightly below 158.50, rising 0.15% on a daily basis.
Gold corrects lower and trades below $4,500 after hitting its highest level since late May above $4,520.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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