USD Outlook Hinges on UST Policy Credibility Amid Fed Response

The US dollar is facing further downside due to investors questioning the credibility of American policy. BofA Securities believes that the Treasury's efforts to suppress long-term yields and the Federal Reserve's response will weaken confidence in the US economy.

According to a recent announcement, the Treasury plans to at least double the maximum size of long-dated bond buybacks to $4 billion per operation from September 9 to November 4. BofA Securities suggests that this move is primarily aimed at containing long-term borrowing costs rather than improving market liquidity.

The dollar weakened after the announcement, while gold and the Swiss franc outperformed. The Fed's response will be critical in determining the direction of the US economy. If the central bank absorbs increased Treasury bill issuance through its balance sheet, it could strengthen the case for selling the dollar against higher-beta currencies.