Dollar Weakens as US Treasury Boosts Bond Purchases

The US Treasury has announced an increase in its purchases of long-dated bonds, effective September 9. The maximum size of liquidity support buyback operations will be at least $4 billion per operation, up from $2 billion previously.

This move is aimed at stabilizing the market and reducing yields. As a result, bond prices have found support, causing the yield on the 10-year US Treasury to drop from 4.71% to 4.65%. This decrease in yields has had a ripple effect globally, easing borrowing costs.

The dollar is feeling the heat as a result of this announcement. The pound-to-dollar pair has risen by 0.70% to hit 1.3624, while the euro-to-dollar pair has increased by 0.80% to reach 1.1667.

According to George Saravelos, Deutsche Bank's lead currency strategist, this move is a sign of increasing administration unease over rising US yields. He believes that the buyback and encouragement to use the FIMA facility for FX reserves are 'soft-form financial repression policies aimed at containing the long-end of the US yield curve.'

Saravelos warns that if the market price of US Treasury bonds is not allowed to adjust down, foreign investors will have to compensate by weakening their currencies. He also notes that this operation is similar to the Fed's Operation Twist, where the Treasury would issue more short-term debt to finance the removal of longer-term debt.