Cooling expectations for Federal Reserve rate hikes, an expanded Treasury bond buyback program, and political uncertainty tied to the upcoming midterm elections are collectively pressuring the US dollar's prospects.
On Thursday, a currency strategy team led by Daniel Tobon at Citigroup released a research note, slashing its three-month forecast for the dollar index to 98.34 from 102.12. This marks a shift from a relatively neutral stance to a near-term bearish view.
The team characterized the Treasury Department's announcement to scale up its bond repurchase operations as "another negative factor for the dollar." Concurrently, Citigroup raised its three-month euro-dollar forecast to 1.1750, citing expectations that the European Central Bank will deliver a 25-basis-point rate hike in September, while market bets on Fed tightening continue to diminish.
As reported earlier, following the joint US-Japan intervention in the yen, Treasury Secretary Bessent's latest move involves expanding Treasury buybacks. The Treasury Department has stated it will "at least double" the repurchase scale for 10-year to 30-year maturities. During the Asian trading session on Friday, the dollar index was hovering around 98.8, with the euro trading near 1.168 against the dollar.
Expanded Treasury Buyback Program
The immediate catalyst for this shift in Citigroup's position is the Treasury's announcement to double the size of its buyback program for 10- to 30-year bonds before November. The strategists noted in their report that Secretary Bessent's objective is to lower long-term borrowing costs, but this likely comes at the expense of a weaker dollar.
According to Citigroup's analysis, this operation exerts downward pressure through two distinct channels: first, by pushing US Treasury yields lower; and second, by stoking market concerns over financial repression. The backdrop for this expanded buyback is the recent surge in US government borrowing costs, with both the 10-year and 30-year auctions in August recording the highest yield levels since the 2000s.
Federal Reserve Policy and Political Risks
Beyond the Treasury's actions, Citigroup strategists also pointed out that the Fed rate hike expectations, which had previously provided support for the dollar, are now being priced out by the market. On the political front, the strategists cautioned that as the November midterm elections approach, investors may be inclined to avoid long dollar positions due to "rising US political uncertainty and the tail risk of election disputes."
However, Citigroup has not altered its long-term assessment of the dollar, maintaining the view that US economic growth prospects remain superior to other G10 economies. The team also outlined potential risks to their new forecast: a US-Iran conflict disrupting oil shipments through the Strait of Hormuz, or a significant expansion in AI-related capital expenditures could both reignite inflationary pressures, potentially prompting the Fed to resume rate hikes and challenging the bearish dollar thesis.
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