Dollar Plunges Amid Treasury Buybacks and AI-Driven Debt Shift
The US dollar has plummeted to its lowest level since May following the Treasury's decision to increase long-term bond buybacks from $2 billion to $4 billion, starting September 9. This move has led to a fall in Treasury yields and has drawn comparisons to Japan's currency intervention practices.
The markets have realized that a yield of 5.3% on 30-year bonds is the pain threshold for the Treasury, similar to how Tokyo sees 164 on USDJPY as a trigger point for intervention. The parallels don't end there.
From a fundamental perspective, the US dollar's fall against the yen is unjustified, given the wide interest rate differential between the Fed and the Bank of Japan. This means the yen is being actively sold as a funding currency in carry trades. Tokyo has to seize the right moment to dampen the bulls' enthusiasm for USDJPY by spending money.
The US Treasury is also having to go against the fundamentals, as the rally in Treasury yields is driven not only by fiscal stimulus and a widening budget deficit but also by geopolitics and competition from artificial intelligence. Hyperscalers are raising funds to finance AI-related projects through corporate bonds, such as Alphabet's debt securities maturing in 2075, with interest rates around 6.8%. This appeal is drawing money away from the US debt market, pushing up Treasury yields.