The dollar saw its sharpest drop in three weeks after the Treasury's unexpected bond-buyback plan had halted a Government-backed rout. Long-dated Treasury yields had climbed to their highest levels since 2007, but the Treasury said it planned to purchase at least twice as many longer-maturity securities, a step that signaled official concern about the selloff. That selloff had been fueled by investor tension over increases in the federal debt, the Iran war, heavy corporate borrowing for artificial-intelligence projects, and inflation that has persisted above the Federal Reserve's target since 2021.
The Bloomberg Dollar Spot Index fell by as much as 0.8%, reaching its lowest point since May 12. The greenback slid versus every major currency, including the yen, as yields fell after the Treasury's announcement. The Swiss franc and the New Zealand dollar were among the biggest gainers of the session.
Even before this announcement, the dollar had been pressured by coordinated U.S.-Japan intervention in the foreign-exchange market late last month aimed at supporting the yen. Treasury Secretary Scott Bessent then said the Federal Reserve's Foreign and International Monetary Authorities Repo Facility could be used to support further yen purchases if needed. Investors read the intervention as partly intended to relieve pressure on the Treasury market by stopping Japanese authorities from selling U.S. bonds to raise dollars. President Donald Trump has also occasionally welcomed a weaker dollar, because it makes U.S. goods more competitive internationally.
The yen climbed as much as 1% on Wednesday to 158.05 per dollar, its strongest reading in more than a week. The yen has had trouble extending the move, having lost roughly 0.7% against the greenback last month. The buyback announcement put extra pressure on a greenback already softened by market expectations that the Fed will not increase rates before December. Traders are watching for the release of the latest Fed minutes later on Wednesday, and for Fed Chair Kevin Warsh's speech at the Jackson Hole conference next week.
Deutsche Bank's global FX research chief, George Saravelos, said both the buyback and the FIMA suggestion are "soft-form financial repression policies aimed at containing the long-end of the US yield curve." He added: "We see both developments as negative for the dollar." Saravelos also said that "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."
Citigroup Inc. strategists agreed that the Treasury's larger long-end buyback program "is a significant signal that should stabilize the back end of the curve and stall the momentum for higher yields."
The Treasury is effectively signaling that it wants to contain long-term borrowing costs. The combination of larger buybacks, use of the FIMA facility, and the absence of early Fed life gives a one-two-two punch to the magnitude of the Treasury yen. As long as government policy keeps long-term yields under control, the dollar may continue to look less attractive to global investors, particularly if no Fed hike arrives before year-end.