United States Dollar Index falls as US Treasury doubles long-dated debt buybacks
- US Dollar slides to its weakest level since May 29 as long-term Treasury yields fall sharply.
- The US Treasury announces larger buybacks of long-term government debt.
- Traders await the FOMC Minutes for fresh clues about the Fed’s interest-rate outlook.
The US Dollar Index (DXY) comes under fresh selling pressure on Wednesday as longer-term US Treasury yields fall sharply following the Treasury Department’s decision to expand its buyback operations.
At the time of writing, the index, which tracks the Greenback's value against a basket of six major currencies, trades around 98.86, its lowest level since late May, and is down 0.80% on the day.
The US Treasury said it will at least double the maximum size of its liquidity-support buybacks for longer-dated government securities. Purchases in the 10-to-20-year and 20-to-30-year maturity sectors will increase from $2 billion to at least $4 billion per operation.
Following the announcement, long-dated Treasury bonds rise, pushing yields sharply lower. The benchmark 10-year yield trades around 4.64%, down more than 5 basis points, while the 30-year yield falls nearly 9 basis points to 5.19%. The 30-year yield climbed above 5.30% on Tuesday, its highest level since 2007.
Falling Treasury yields reduce the relative appeal of US assets, adding to pressure on the Greenback, which was already weighed down by fading expectations of an imminent Federal Reserve (Fed) interest-rate hike following a string of weak US economic data in recent weeks.
However, uncertainty relating to the Fed’s monetary policy outlook persists, as the energy shock stemming from the war in the Middle East clouds the inflation outlook and prevents traders from ruling out a hike later this year.
Looking ahead, traders will closely watch the release of the minutes from the FOMC’s July meeting, due at 18:00 GMT.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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