Dollar Tumbles as Treasury Boosts Bond Buybacks

The US dollar has hit 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 led to a fall in Treasury yields, drawing parallels with Japan's currency intervention practices.

From a fundamental perspective, the dollar's decline against the yen is unfounded due to the wide interest rate differential between the Federal Reserve and the Bank of Japan, which means the yen is actively sold as a funding currency in carry trades.

Tokyo is forced to intervene at the right moment to dampen enthusiasm for USDJPY. The US Treasury must also go against fundamentals, as Treasury yields are influenced not only by fiscal stimulus and a widening budget deficit but also by geopolitics and competition from artificial intelligence.

Hyperscalers like Alphabet are raising funds for AI-related projects through corporate bonds, attracting money away from the US debt market. This is pushing up Treasury yields, making it difficult to sustain gains made by bears on USDJPY through coordinated currency intervention without support from the Bank of Japan.