Dollar Faces Fed Test as Treasury Yields Soar to 2007 High
The US dollar is facing a significant test as Treasury yields surge to their highest level since 2007. The rise in yields has led to a decline in the EUR/USD pair, but the Federal Reserve's hawkish stance could limit further gains in Treasury yields and provide additional support for the US dollar.
According to Bank of America, around half of surveyed asset managers believe the Treasury's buyback program is ineffective. Meanwhile, 29% say that Treasury buybacks actually push rates higher rather than lower. This growing correlation between the US dollar and Treasury yields makes it difficult to predict the dollar's reaction to the Fed's decision.
The derivatives market assigns a 92% probability to a Fed rate hike in September and puts the odds of two rounds of monetary tightening in 2026 at 79%. However, if the FOMC signals only two rate hikes and the Fed chair offers no new guidance, the greenback could come under pressure.