The dollar has fallen to its lowest level since May after the US Treasury said it would at least double long-term bond buybacks, according to HSBC. The bank flagged falling US real yields and a narrowing rate gap with the eurozone as risks to its mildly bullish dollar call, with more weakness likely if the Federal Reserve holds rates in September.
Treasury buyback plan adds to dollar pressure
The dollar has fallen to its lowest level since May after the US Treasury announced it would at least double long-term bond buybacks, HSBC said. The bank noted the move has added to a backdrop of lower medium- and long-term yields, higher inflation expectations and falling US real yields that is increasingly testing its mildly bullish dollar view.
HSBC said the dollar index has declined around 2.5% since the July Federal Reserve meeting, a slide it attributed largely to shifting rate expectations rather than a single event. Even as structural concerns around the currency build, the bank said near-term dollar moves remain primarily a function of economic data and rate pricing.
Euro gains on narrowing rate gap
HSBC pointed to a narrowing two-year rate differential between the US and the eurozone as a key support for EUR/USD, as markets scale back expectations for further Fed tightening. That dynamic has been reinforced by stronger eurozone PMI data, elevated oil prices and growing expectations of another rate hike from the European Central Bank.
Looking ahead, HSBC's key takeaway is that falling US real yields and a narrowing short-term rate differential favor continued dollar weakness, particularly if the Fed confirms an extended pause at its September meeting. Should the Fed remain on hold, the bank sees scope for near-term dollar softness to persist.
Source: Investinglive (Dollar slips to lowest since May as Treasury doubles bond buybacks, what's next?)
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