Dollar Weakens as US Treasury Boosts Bond Buybacks, Shifts Currency Markets
US Treasury Actions and Impact on Global Currencies
By Chibuike Oguh
US Treasury Buyback Announcement
NEW YORK, Aug 19 (Reuters) - The dollar weakened against major currencies on Wednesday after the U.S. Treasury Department announced it plans to double liquidity support buyback operations for longer-dated bonds.
Immediate Currency Market Reactions
The euro rose 0.78% against the dollar to $1.16640, hitting its highest level in more than 2-1/2 months.
Sterling was 0.48% higher against the dollar at $1.3597, rising to its highest since May 11.
Expert Commentary on Dollar Depreciation
The announcement suggests an expansionary monetary policy and the availability of more dollars in the market, which is causing the U.S. currency to depreciate, said Juan Perez, director of trading at Monex USA.
"It makes sense for the dollar to depreciate since this is on top of other themes that have been negative for the dollar including a Federal Reserve that is not going to be communicative and no progress on the Middle East tensions," Perez said.
Bond Yields and Treasury Policy
Market Response to Treasury Actions
Long-term Treasury bond yields fell sharply following the announcement, with the 30-year bond yield dropping almost 10 basis points to 5.1942%. The yield on benchmark U.S. 10-year notes fell 4.56 basis points to 4.66%.
The U.S. Treasury said the change will be effective between September 9 and November 4.
Analyst Insights on Financial Conditions
"Treasury would have to issue more treasury bills to finance the removal of duration from the market," said Deutsche Bank analyst George Saravelos in an investor note.
"To the extent that this eases financial conditions, it would arguably necessitate an offsetting tightening from the Federal Reserve. If Chair Warsh does not recognize the buyback as a factor driving an easing of financial conditions, we would take it as an additional dollar negative driver."
Further Dollar Weakness
The dollar weakened 1.65% to 0.7992 against the Swiss franc, hitting its lowest since mid-June.
Inflation and Central Bank Policy
Inflation Focus at the Federal Reserve
INFLATION FOCUS
Concern about inflation deepened at the Fed's meeting last month, with "several" policymakers ready to raise interest rates and "many" saying a hike in borrowing costs would be needed if inflation does not decline to its 2% target, the minutes of the session showed on Wednesday.
Shifting Policy Expectations
There was no mention in the minutes of support for a rate cut, a sign of how the Fed's policy debate has shifted over the course of a year that began with an expectation that the central bank would be able to lower borrowing costs this year as inflation slowed.
Global Economic and Currency Developments
Oil Prices and Geopolitical Tensions
Brent crude prices rose 0.66% to settle at $91.62 amid escalating tensions in the Middle East after the United Arab Emirates decided to suspend all financial and economic transactions with Iran.
Yen and Dollar Index Movements
The Japanese yen strengthened 0.70% to 158.48 per dollar, pulling away from the closely watched 160 level after giving back much of its intervention gains.
The dollar index, which measures the U.S. currency against six major peers, was down 0.72% at 98.93, dropping to its lowest since late May.
(Reporting by Chibuike Oguh in New York; Editing by Nia Williams and Chizu Nomiyama )
