USD downside risks as Washington hits USD sentiment again
At a Glance
The desk opines that recent developments in the US Treasury's bond buyback strategy are exerting downward pressure on USD sentiment, as highlighted in a discussion between MUFG's Derek Halpenny and Shan Husain. The statement notes that the USD has experienced a notable decline over the past four weeks, primarily influenced by policies that impact bond yields negatively. In light of this, the desk suggests that while the USD faces downside risks, geopolitical factors, including US-Iran tensions and rising energy prices, may offer a degree of support. Per the full note source, the sentiment shift underscores a broader trend where Washington's policy trajectories directly affect currency valuation and investor confidence.
Key Takeaways
- 01USD sentiment is under pressure due to US Treasury's increased bond buyback, affecting investor confidence.
- 02Geopolitical factors like US-Iran tensions and rising energy prices could mitigate potential USD declines.
- 03Analysts have differing views on the impact of USD weakness, with targets suggesting a wide band of outcomes for EUR/USD.
Full Analysis
What the desk is arguing
The desk emphasizes the correlation between the US Treasury's bond buyback increment and its adverse impact on the US dollar, framing it as a critical factor compounding existing market pressures. This situation is evidenced by the USD's significant decline, the largest since notable interventions around Liberation Day last year, as referenced in recent discussions by MUFG.
The discussion indicates that while USD sentiment is under duress, external factors such as persistent geopolitical risks with Iran and the potential for increased energy costs could temper outright bearish moves on the dollar, thus presenting a nuanced view of the market.
Where it sits in our coverage
For the EUR/USD pair, our consensus target is 1.1634, with a range from 1.1200 to 1.2000 as various firms forecast different outcomes.
- goldman: Dec26 1.1200
- anz: Dec26 1.1400
- commerzbank: Dec26 1.2200
The desk's analysis appears to align with the broader consensus expecting modest USD weakness, but within the range provided, particularly toward the lower bound of the projection.
How other firms see it
Firms like goldman and jpmorgan forecast more aggressive targets for EUR/USD, indicating a stronger euro against the dollar as the market navigates these new policy changes. Conversely, firms such as bofa are more conservative, suggesting limits to the potential downside for USD.
Looking further, the anticipated movement in USD/JPY will likely reveal how these dollar trends interact with recent BOJ policy adjustments. Additionally, shifts in BoE policy will be critical for the GBP/USD trajectory.
Market Implications
Traders should closely monitor the EUR/USD levels around 1.1700 for signs of a stronger euro, as well as geopolitical developments that could sway market sentiment. A shift in US bond yields will also be pivotal to observe in the coming weeks.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bullish | 1.1800 |
ING | Neutral | 1.1700 |
Rabobank | Bullish | 1.1800 |
From the original
Derek Halpenny, Head of Research Global Markets EMEA & International Securities sits down with Shan Husain in FI FX Sales to discuss the fallout for the US dollar following the US Treasury announcement of increase UST bond buybacks on Wednesday. The dollar drop over the four week
Related speeches
4 itemsFX Daily: Dollar soft, US policy in spotlight
The desk sees the US dollar opening the week on a weak note, driven by market expectations surrounding upcoming US policy announcements. Per the full note from ing-think, the week presents significant events, including a speech from Treasury Secretary Scott Bessent on fiscal consolidation and fresh sanctions on Iran, both of which could exacerbate existing dollar weakness. Concurrently, there's a noted long-squeeze in USD positioning, reflecting traders' hesitancy to fully commit to bearish dollar bets just yet. In the context of our internal coverage, while the consensus views the dollar’s decline as potentially temporary, the looming policy decisions serve as key catalysts for market sentiment.
FX Daily: Fading geopolitical risk, focus on rate differentials
The desk emphasizes that geopolitical tensions in the Middle East have surprisingly failed to bolster the dollar, while focus shifts decisively back to interest rate differentials, as noted in the recent commentary [source]. Despite the backdrop of escalating US-Iran tensions, including US strikes on Iranian infrastructure and threats of a full blockade of the Strait of Hormuz, the dollar remains relatively stable owing to improving sentiment in risk assets and a decline in oil prices. Front-end rate implications are shifting, with the 2-year USD swap rate having lost ground this week, presenting a broader context where some investors are recalibrating their hawkish expectations for the Fed against improving outlooks overseas; currently 35 basis points of tightening is priced in for December 2023 while the euro has gained on the dollar amid expectations of ECB hawkishness.