USD downside risks as Washington hits USD sentiment again
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.
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.
How firms align with this view
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.
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.
Risks to this view
A significant escalation in US-Iran relations or sudden shifts in US energy prices could reverse the current dollar sentiment and lead to a stronger USD, counteracting expectations of downside movement.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
MUFG | Bullish | 1.1800 |
UOB | Bullish | 1.1725 |
Deutsche Bank | Neutral | 1.1668 |
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 weeks covering Japan/US FX intervention is the largest since the period following the Liberation Day announcements last year. Washington policy has again undermined confidence and depressing bond yields brings USD downside risks.
However, it might not be one-way traffic given the US-iran risk persists and higher energy prices could discourage foreign currency buying.
Sources & References
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