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US dollar weakens to May lows as long-end yields fall
OCBC links the move to larger long-dated Treasury buybacks, taking next quarter operations from $2 billion to at least $4 billion from September 9 to November 4.
The US dollar weakened to its lowest level since May, with OCBC strategists attributing the drop to lower long-end Treasury yields, driven by an expanded program of longer-dated buybacks.
OCBC noted that the Treasury plans to increase the size of longer-dated buyback operations from $2 billion to at least $4 billion during the next refunding quarter, scheduled from September 9 to November 4. The strategists said the announcement signaled the Treasury’s discomfort with rising long-term yields, which should help restrain further increases in the near term.
Even with the buybacks, OCBC said structural forces that can lift yields remain in place, including large AI-related financing needs, persistent fiscal deficits, and rising Japan government bond yields. With long-end yields effectively capped, OCBC also suggested a weaker dollar may be part of the trade-off to keep US government debt attractive to foreign buyers.
Turning to central bank expectations, OCBC said attention is shifting back to the Fed, citing July FOMC minutes that showed policymakers discussing the possibility of further rate hikes without concluding that near-term tightening is warranted. The next catalyst is Fed Chair Warsh’s Jackson Hole speech next week, and OCBC expects the message to be unlikely to be notably hawkish, keeping the dollar under pressure in the near term.