US Dollar: Debasement worries weigh after buyback – Scotiabank

Scotiabank strategists Shaun Osborne and Eric Theoret note the US Dollar (USD) is extending losses to its weakest level since mid-June as markets react to the US Treasury’s decision to double bond buybacks. The move is seen as an attempt to manage longer-term yields amid doubts over Federal Reserve (Fed) inflation resolve and US fiscal sustainability, with US Dollar Index (DXY) seen falling another 1–1.5% near term.

Treasury buybacks pressure Dollar further

"The USD is weakening further today, sliding to its lowest since mid-June. Stocks are mixed, crude oil prices are stronger and major bond markets are a little weaker. Treasurys are underperforming and the curve is steepening again."

"Yesterday’s Treasury Dept. announcement that it was doubling the size of its bond buybacks took the market by surprise. The announcement came just two weeks after its latest quarterly refunding announcement and a few hours before a 20Y Treasury auction."

"The plan targets longer-term rates and is limited in scale; buybacks go from USD2bn to USD4bn and run from September 9th-November 4th. It’s ostensibly a liquidity management issue but the announcement left the impression that the Treasury is trying to calm the Treasury markets after the recent ramp up in term rates and it’s not a good look."

"It suggests that the Treasury is trying to manage longer-term rates—which have been rising because markets are questioning the Fed’s commitment to inflation fighting and investors are worried about the sustainability of US fiscal policy. If yields can’t fully take the strain from those concerns, the USD will have to. The dollar debasement trade is making a comeback."

"The July FOMC minutes showed that “many” policymakers felt tighter policy would be needed if inflation didn’t decline. But recent signs of abating price pressures and some softening in the labour market suggest the risk of a September hike is still lower than market-implied probabilities (a bit more than 30%)."

"On the charts, DXY losses are extending through the 50% retracement of the dollar’s H1 gains, paving the way for a further 1-1.5% decline in the index in the near term."

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