Dollar Plunges as US Treasury Boosts Liquidity
The US Treasury's decision to boost liquidity and increase buybacks of long-dated bonds sent the dollar tumbling to a 2.5-month low on Wednesday, with the dollar index (DXY00) falling by -0.80%.
This move weakened the dollar's interest rate differentials, causing it to retreat in value. The Treasury also announced plans to at least double the maximum size of its liquidity support buyback operations for longer-dated nominal coupon sizes to at least $4 billion per operation, effective September 9.
The US Federal Reserve's (FOMC) July 28-29 meeting minutes indicated that policy tightening would be necessary if inflation didn't decline. The labor market was described as stable, with labor demand and supply in balance, but participants' inflation outlooks were 'highly uncertain,' clouded by the re-escalation of the Iran war.
The markets are discounting a 32% probability of a +25 bp rate hike at the next FOMC meeting on September 15-16. The euro (EUR/USD) rallied to a 2.5-month high, finishing up by +0.84%, while the yen (USDJPY) fell by -0.80%. Precious metals prices also rose, with gold soaring to a 2.5-month high.