US Treasury's Bond Buybacks Weaken Dollar as Inflation Risks Rise

The US dollar has softened over the summer due to the US Treasury's announcement to at least double long-term bond buybacks. The move, which aimed to dampen long-term yields, undermined confidence in the dollar and contributed to its decline. According to MUFG's Lee Hardman, the weaker dollar was also triggered by rising inflation risks.

The Treasury's efforts to cap long-term yields initially led to a brief relief rally for the dollar, but it has since reversed. The maximum size of the first larger bond buyback operation was tripled from $2 billion to $6 billion, which caused long-term US yields to jump higher by around 5bps. However, this increase has since settled at about 2-3bps higher.

The Treasury's expanded bond buyback program could lead to annual purchases of just over $200 billion, a smaller version of the Fed's 'Operation Twist'. However, it is uncertain how long the bigger purchases will be sustained and if the size of operations could increase further going forward. Lee Hardman notes that the US Treasury's actions weigh on the dollar at a time when upside inflation risks are increasing.