US Dollar: Under pressure as yields capped – OCBC

OCBC strategists Sim Moh Siong and Christopher Wong say the Dollar has weakened to its lowest level since May as expanded Treasury buybacks pushed long-end US yields lower. They expect restrained yields and a Fed that remains on hold to keep the USD under pressure in the near term, with attention turning to Fed Chair Warsh’s Jackson Hole speech next week.

Dollar soft with yields constrained

"The USD (i.e. DXY) fell to its weakest level since May, while long-end US Treasury yields declined after the US Treasury announced larger long-end bond buybacks. The Treasury will increase the size of its longer-dated buyback operations from USD2bn to at least USD4bn during the next refunding quarter, from 9 September to 4 November."

"Even so, the move signals Treasury's discomfort with the rise in long-term yields and should help restrain further increases in long-end yields in the near term. That said, the structural forces pushing yields higher, including substantial AI-related financing needs, persistent fiscal deficits and rising JGB yields, remain in place."

"If long-end yields are effectively capped, a weaker USD may be part of the trade-off to maintain the attractiveness of US government debt for foreign investors. The broad-based USD weakness overnight also revived concerns about currency debasement, supporting demand for both gold and the CHF, which shares many of gold's safe-haven and zero-yield characteristics."

"Lower yields driven by the buyback announcement have shifted market attention back to the Fed. The July FOMC minutes showed policymakers are discussing the possibility of further rate hikes but have yet to conclude that near-term tightening is warranted. Economic data released since the July meeting has also reduced the urgency for additional policy tightening."

"The next key event is Fed Chair Warsh's speech at the Kansas City Fed's Jackson Hole symposium next week. In the absence of explicit forward guidance, we do not expect a notably hawkish message. If the Fed remains on hold, the USD is likely to stay under pressure in the near term."