Dollar Under Pressure as US Treasury Takes Unusual Steps to Contain Yields

Deutsche Bank's head of foreign exchange research, George Saravelos, has sounded an alarm about potential risks to the US dollar. He believes that recent actions by the US Treasury, including increased buybacks of long-term government bonds and the use of the FIMA mechanism by Japan, are signs of 'soft' financial repression aimed at containing US Treasury yields.

The FIMA mechanism allowed Japan to borrow dollars against its existing Treasury securities as collateral, effectively avoiding the need to sell US government bonds. This move was seen in conjunction with measures taken by the United States and Japan to support the yen, which had not been done in nearly three decades.

Saravelos warns that containing Treasury yields could shift pressure onto the dollar. If the market price of US government bonds is not allowed to fall, the value of these securities for foreign investors in currency terms could adjust through a weaker dollar. The analyst expects markets to watch the Federal Reserve's response and notes that if Fed Chair Kevin Warsh does not take bond buybacks into account as a factor easing financial conditions, this could become an additional negative factor for the dollar.