Dollar slips to lowest since May as Treasury doubles bond buybacks, what's next?
At a Glance
The dollar's recent decline to its lowest level since May is primarily driven by evolving rates dynamics rather than a singular trigger. The expanded bond buyback initiative by the US Treasury has put downward pressure on medium and long-term yields, complementing market expectations for a more dovish Federal Reserve approach, as highlighted in the analysis by Eamonn Sheridan source. Furthermore, the drop in US real yields and heightened inflation expectations are also contributing factors to the dollar's weaker performance. Given that the Fed seems likely to remain on hold in September, there may be continued downside risk for the dollar, especially against the backdrop of supportive eurozone economic indicators and potential policy tightening from the ECB.
Key Takeaways
- 01The dollar has hit its lowest level since May due to shifting rates expectations.
- 02The Treasury's doubling of bond buybacks is pressuring yields and undermining the dollar's strength.
- 03Expectations of a Fed pause in September are likely to exacerbate dollar weakness.
- 04Stronger eurozone indicators and imminent ECB hikes support the euro, creating a favorable backdrop for the EUR/USD pair.
Full Analysis
What the desk is arguing
The desk believes the dollar's downturn is reflective of broader shifts in the interest rate landscape, driven significantly by the Treasury's enhanced buyback strategy. Per the full note source, expectations of a Fed pause are further undermining confidence in the dollar, which has declined approximately 2.5% since the July FOMC meeting.
The expanding buyback program is expected to suppress yields, thus eroding the dollar's relative strength against other currencies like the euro and the pound. This aligns with HSBC's views indicating that the dollar's structural headwinds are intensifying, threatening its previously held bullish stance on the currency.
Where it sits in our coverage
For the EUR/USD pair, our current spot is 1.1679, with a median consensus target of 1.1700, spanning a range of 1.1200–1.2000. Notably, HSBC projects a target of 1.1700 for Mar26 and Dec26 while also referencing targets from Morgan Stanley at 1.2000 and Commerzbank at 1.1900 for the same tenor.
This perspective contrasts with the market consensus, where the outlook appears mixed; thus the desk's interpretation aligns closely with the upper end of projected valuations.
How other firms see it
Many firms show alignment in their views that the dollar may weaken further, with HSBC and Morgan Stanley highlighting the implications of a potential Fed hold. Conversely, firms like Citi depict a more skeptical outlook on rapid dollar depreciation, with targets suggesting less upward potential in the pro-dollar narrative.
The trajectory of EUR/USD appears intricately linked to upcoming ECB policy decisions, especially as the market evaluates the pace of future hikes in response to Eurozone economic performance, particularly PMI indicators.
Market Implications
Traders should monitor the EUR/USD level around 1.1700, as this acts as a critical resistance point for potential further upside if the Fed remains on hold. The ongoing changes in Treasury yields and the prospect of additional ECB tightening will influence market sentiment significantly.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bullish | 1.1800 |
ING | Neutral | 1.1700 |
Rabobank | Bullish | 1.1800 |
From the original
The dollar's slide to its weakest level since May reflects a shift in the rates backdrop rather than a single catalyst, with the Treasury's expanded buyback plan adding to pressure on medium and long-term yields already primed for lower Fed expectations. HSBC's framing suggests n
Related speeches
4 itemsDollar falls alongside bond yields in final stretch of the week
Deutsche Bank sees 4 reasons Treasury buyback move is dollar negative (ps. Fed hike too?)
The desk interprets Deutsche Bank's analysis as a warning sign for the dollar, emphasizing that the recent Treasury buyback announcement may signal a shift toward increased financial repression tools aimed at controlling long-end yields. This observation suggests a potential structural downtrend for the dollar, regardless of short-term Federal Reserve policy actions, as echoed in the decline of U.S. Treasury yields and the dollar in recent sessions. Per the full note from Deutsche Bank, the administration's discomfort with rising yields indicates a broader policy shift. The market appears sensitive to the dollar's fate, particularly if further measures materialize that distort financial conditions.