Dollar Falls to Lowest Level Since May; Treasury Buyback Sparks Bond Rally
The US dollar weakened sharply in Wednesday's trading, recording its largest daily drop in about three weeks. The Bloomberg Dollar Spot Index fell as much as 0.7%, pushing the greenback to its lowest level since mid-May. The dollar weakened against all major currencies, with the Swiss franc, Swedish krona, and yen among those posting the biggest gains.
Pressure on the dollar mounted after the US Treasury Department unexpectedly announced an expansion of its long-term bond buyback program. The move sparked a rally in the Treasury market and helped push the 30-year bond yield down by about 8 basis points, after it had previously touched its highest level since 2007.
The Treasury's policy move is viewed as a signal that the government is taking a more serious approach to addressing pressures in the bond market. The earlier surge in yields had been driven by growing concerns over US federal debt, inflation risks, the conflict involving Iran, and massive corporate financing needs for artificial intelligence investments. These conditions had previously led investors to demand a higher premium for holding long-term bonds.
The drop in yields subsequently weighed on the dollar as the yield appeal of US assets diminished. The greenback also faced additional pressure from expectations that the Federal Reserve is unlikely to raise interest rates before December. Markets are now awaiting the release of the FOMC minutes to gauge the strength of support for further tightening and to understand how Fed officials view inflation risks.
The Japanese yen was among the biggest beneficiaries of the dollar's weakness. The USD/JPY pair fell to around 158.17, bringing the yen to its strongest level in over a week. This movement provided some breathing room for the Japanese currency, which had previously struggled to sustain gains following joint US-Japan intervention in the foreign exchange market.
Newsmaker Analysis: The current weakness in the dollar stems from a potent combination of falling Treasury yields and reduced expectations for a Fed rate hike. If Treasury buybacks succeed in keeping long-term yields in check and the FOMC minutes are not overly hawkish, downward pressure on the dollar could persist. This scenario could serve as a positive catalyst for gold, the euro, the pound sterling, and the yen. However, if the Fed minutes highlight inflation risks and open the door to interest rate hikes, the dollar could still rebound from its current lows. (gn)*
Source: Newsmaker.id
