The U.S. dollar is on track to finish the week 0.8% lower after the Treasury Department's plan to double its bond buybacks failed to calm currency traders. St. Louis Fed President Alberto Musalem, meanwhile, implied higher interest rates are still justified ahead of next month's policy meeting.
Dollar slides despite Treasury's buyback move
Bond traders briefly cheered after the Treasury Department said it would double its planned buybacks of longer-dated notes and bonds, but yields kept pushing higher on Thursday, even with Treasury Secretary Scott Bessent going on CNBC to try to calm things down. Currency traders reacted differently. The dollar stayed in its slump even though rising Treasury yields tend to drag the greenback higher.
The ICE U.S. Dollar Index, which grades the dollar against a basket of major rivals including the euro, tallied its biggest daily drop since March on Wednesday and was flat in recent trading, according to FactSet. The dollar is now trading near its lowest levels since late May.
Robin Brooks, a senior fellow at Brookings and a former top currency strategist at Goldman Sachs, said the surprise announcement suggests an important pain threshold may finally have been crossed. The $4 billion-a-pop buybacks amount to only a drop in the bucket against the $31 trillion debt pile, and investors appear to be coming to terms with the fact that the pile of long-dated Treasurys will keep growing.
Musalem keeps door open on further hikes
The dollar's slide comes as the Federal Reserve weighs its next move. Federal Reserve Bank of St. Louis President Alberto Musalem said Thursday he is keeping an open mind about the September policy decision, though he implied higher rates are still justified by how the economy is performing. He described monetary policy as "accommodative," noting the inflation-adjusted federal funds rate sits below the neutral long-run rate the committee targets.
Musalem said underlying inflation pressures run between 2.5% and 3%, against the Fed's 2% target. According to Reuters: "We need to bring inflation back down to 2% over the next 18 months." He said his view that inflation will not ease led him to favor hiking the current 3.5% to 3.75% federal funds rate at the late-July meeting, and he called for gradual increases rather than larger, more disruptive ones at the September 15-16 FOMC meeting.
Sources: MarketWatch, Investing.com
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