US Dollar Vulnerable to Shaky Basis Trades Amid Secondary Sanctions Uncertainty

Commerzbank's Volkmar Baur points out that the US dollar has been stabilizing, but remains vulnerable due to shaky basis trades. The cause of this instability lies in the US Treasury Secretary's vague comments on secondary sanctions and falling US yields.

The lack of clear details from the US Treasury Secretary's press conference left the market wondering about potential targets and timelines for implementation. As a result, the dollar stabilized during yesterday's trading.

Baur notes that rising interest rates should typically support the US dollar, but recent turbulence has shown that the opposite can be true. This is particularly concerning due to the high proportion of hedge funds among US Treasury investors, which could lead to sharp fluctuations in the bond market as basis trades are unwound.

The expansion of the buyback program for illiquid long-term Treasury bonds and the intervention in the yen were seen as precautionary measures to prevent worse outcomes. However, these interventions came at the expense of the US dollar, demonstrating that they may not be a favorable development for the currency.