Dollar slips to lowest since May as Treasury doubles bond buybacks, what's next?
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.
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.
How firms align with this view
Aligned with the desk view
Contrary positioning
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.
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.
Risks to this view
A stronger than anticipated economic report from the US or a hawkish Fed surprise in September could reverse the current dollar weakness narrative. Additionally, if the ECB signals a more cautious approach than expected, the euro could lose appeal, thereby supporting the dollar.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bullish | 1.1800 |
ING | Neutral | 1.1700 |
Rabobank | Bullish | 1.1800 |
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 near-term price action will stay driven by incoming data and rate pricing rather than the structural concerns building beneath the surface, meaning a September Fed hold could extend the greenback's slide. On the other side, the euro has drawn support from a narrower short-term rate differential with the US, alongside firmer regional PMI readings, elevated oil prices and the prospect of a further ECB hike, a combination that leaves EURUSD positioned to extend gains if the Fed stays on the sidelines. --- Earlier: Gold rises to the highest since May 15 as dollar doom spreads Westpac says dollar's structural headwinds outweigh recent resilience, see EUR/USD and GBP/USD higher --- HSBC says falling US real yields and a narrowing rate gap with Europe are chipping away at its mildly bullish dollar call, with more weakness likely if the Fed stays on hold in September.
Summary: The dollar has fallen to its lowest level since May after the US Treasury said it would at least double long term bond buybacks HSBC said lower medium and long-term yields, higher inflation expectations and falling US real yields are challenging its mildly bullish dollar view The dollar index has declined around 2.5% since the July FOMC meeting HSBC still sees near-term dollar moves as mainly driven by economic data and rate expectations, despite growing structural concerns A narrowing US-eurozone two-year rate differential has supported EURUSD as markets pare back expectations for further Fed tightening Stronger eurozone PMI data, elevated oil prices and expectations of another ECB hike have also supported the euro, with HSBC flagging further USD weakness as likely if the Fed holds steady in September The dollar has fallen to its lowest level since May after the US Treasury announced it would at least double long term bond buybacks, according to HSBC. The bank said the move has added to a backdrop of lower medium and long-term yields, higher inflation expectations and falling US real yields that is increasingly testing its mildly bullish dollar view. HSBC noted that the dollar index has declined around 2.5% since the July Federal Reserve meeting, a slide it attributed largely to shifting rate expectations rather than a single event.
Even as structural concerns around the currency build, the bank said near-term dollar moves remain primarily a function of economic data and rate pricing, meaning the greenback's trajectory in coming weeks will likely hinge on how incoming data shapes the path for Fed policy. On the other side of the ledger, HSBC pointed to a narrowing two-year rate differential between the US and the eurozone as a key support for EURUSD, as markets scale back expectations for further Fed tightening. That dynamic has been reinforced by stronger eurozone PMI data, elevated oil prices and growing expectations of another rate hike from the European Central Bank, all of which have added to upward pressure on the single currency.
Sources & References
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