US Dollar Softens Amid Repurchase Program Uncertainty

The US dollar has given back about 1% of its summer gains, coinciding with the repurchase announcement on August 19. The US Dollar Index fluctuated around 98.80 on September 10, representing a decline from its August highs.

Lee Hardman, a strategist at MUFG Bank, pointed out that the trigger for the dollar's weakness was the US Treasury's announcement to double the scale of long-term bond repurchases. This operation aimed to suppress or cap long-end yields but undermined confidence in the US dollar when upside risks to inflation were rising.

The repurchase program has rewritten the logic of US dollar pricing, with markets reassessing whether long-end rates are viewed as an object of management and whether official intervention can alter supply expectations. The divergence between long-end yields and inflation risks has formed, with repurchases aiming to ease long-end interest rates while price and energy shocks continue to inject upside risks into inflation expectations.

Hardman believes that if the long end is 'managed' while inflation risks are not suppressed, the support provided to the dollar by real interest rates and nominal spreads becomes unstable. The annualized purchase volume of the repurchase operations could exceed $200 billion, equivalent to a scaled-down version of the Federal Reserve's 'Operation Twist'. However, the uncertainty itself feeds into exchange rate risk premiums.