Dollar hits multi-month low after Treasury doubles bond buybacks

The U.S. dollar fell sharply on Wednesday after the Treasury Department surprised markets by at least doubling the maximum size of its long-dated bond buyback operations, a move that pushed yields lower and eroded the greenback's interest-rate advantage against major currencies.

The Bloomberg Dollar Spot Index dropped as much as 0.7% during the session, its largest decline in three weeks, touching its lowest level since mid-May. The Dollar Index traded around 98.86, down 0.80% on the day, according to FXStreet. The dollar weakened against all G10 currencies, with the Swiss franc, Swedish krona, and Japanese yen leading gains.moomoo+1

Treasury Doubles Buyback Cap

The Treasury announced it would raise the per-operation cap on liquidity-support buybacks covering the 10-to-20-year and 20-to-30-year nominal coupon sectors from $2 billion to at least $4 billion. The move came after the 30-year yield climbed above 5.30% on Tuesday, its highest since 2007.investing+1

Following the announcement, the 30-year yield fell nearly 9 basis points to around 5.19%, while the 10-year yield dropped more than 5 basis points to approximately 4.64%. The USD/JPY pair fell as much as 0.9%, with the yen strengthening to 158.17 per dollar.fxstreet+2

Deutsche Bank Warns of Further Dollar Weakness

George Saravelos, Deutsche Bank's ↗ 0.69% head of FX research, compared the action to the Federal Reserve's former "operation twist," noting that the Treasury would need to issue more bills to finance the removal of duration from the market.investing

"If the market price of USTs is not 'allowed' to adjust down, the foreign exchange price of UST owned by foreign investors has to adjust via a weakening in the dollar," Saravelos wrote in a client note. He described the buyback as "soft-form financial repression" and warned that if Fed Chair Kevin Warsh does not acknowledge the buyback as an easing factor, "we would take it as an additional dollar negative driver".investing

Fed Minutes and Middle East Tensions in Focus

Markets are now awaiting the release of minutes from the Federal Reserve's July meeting, due at 2 p.m. Eastern Time on Wednesday. Investors are looking for signals on whether support for further monetary tightening has intensified.reuters

Meanwhile, a stalemate in the Middle East has lifted oil prices to nearly three-week highs, keeping inflation risks alive. President Trump said on Tuesday there were no talks with Iran and that the Strait of Hormuz was open, while Iran said the strait remained shut to shipping.reuters

Harvinder Kalirai, chief global fixed income and currency strategist at Alpine Macro, said in a client webcast that if the Fed does not follow through with rate hikes currently priced in, "the upside for bond yields should be very limited here".reuters