Dollar Debasement Fears Resurface Amid US Policy Uncertainty

The US Treasury's surprise expansion of its long-end buyback programme has revived concerns about Dollar debasement, leading to a weaker USD and stronger Gold. According to OCBC's Sim Moh Siong and Christopher Wong, this move is not equivalent to quantitative easing, as the Treasury is purchasing longer-dated bonds while funding the operation through increased Treasury bill issuance.

The analysts highlight that investors are growing uneasy with what they perceive as a more activist Treasury, citing the timing of the buyback announcement and earlier intervention in EURJPY. This departure from the Treasury's commitment to a 'regular and predictable' approach has raised concerns about US policy uncertainty, which is typically bearish for the USD.

Additionally, markets are questioning whether the Federal Reserve could face pressure to keep rates lower than otherwise warranted to contain government financing costs. Uncertainty around the Fed's reaction function and growing doubts about its willingness to prioritise inflation have sharpened focus on Chair Warsh's upcoming Jackson Hole remarks. The analysts warn that if Chair Warsh and other Fed officials fail to push back against debasement concerns, the USD could face further downside.

Despite these risks, OCBC remains neutral on the USD, citing rising real yields driven by AI-related investment demand competing with heavy government borrowing. This trend is expected to limit the risk of an overly dovish Fed and contain USD downside.