The recent commitment by US authorities to expand Treasury buyback operations has sparked comparisons with Japan's policy framework, where yield curve control aimed at managing borrowing costs ultimately contributed to prolonged yen weakness. Wall Street analysts are now flagging the US dollar as a potential primary casualty of this intensified debt repurchase initiative, with the currency hovering near three-month lows and poised for its weakest weekly performance this month.
Robin Brooks, a senior fellow at the Brookings Institution, characterized the government's move as the clearest indicator yet that the US is emulating Japan's approach by allowing currency depreciation to address underlying economic challenges. He warned that policymakers are effectively "playing with fire" in this strategy.
Amid sustained pressure on global long-dated bonds, US Treasury Secretary Scott Bessent announced on Wednesday a doubling of weekly liquidity support repurchase operations for 10- to 30-year maturities, raising the size from $2 billion to at least $4 billion per operation. This announcement triggered an immediate decline in long-end yields, with the 30-year Treasury yield dropping nearly 10 basis points to 5.18% within hours. However, some of those gains have since been retraced, as the 30-year yield now stands at 5.26% and the 10-year yield has climbed back above 4.7%.
The Treasury's expanded buyback program is placing the dollar in a precarious position. Mohit Kumar, chief European economist at Jefferies International, noted that any form of yield management inevitably weakens the currency. Gerald Gan, chief investment officer at Singapore family office Reed Capital, expressed a more direct view, stating that the dollar is clearly the biggest loser here, as Bessent appears to be deliberately suppressing long-term real rates while signaling tolerance for a softer dollar to sustain economic momentum.
Steven Barrow, head of G10 strategy at Standard Bank, also cautioned that using buyback operations to compress bond yields only amplifies pressure on the dollar without addressing the fundamental budget deficit driving higher Treasury yields. However, some analysts argue that direct comparisons between US and Japanese policies have limitations. Abenomics, the economic program championed by former Japanese Prime Minister Shinzo Abe, relied on aggressive monetary easing to spur growth, including massive quantitative easing that effectively printed yen to purchase bonds and suppress yields, thereby forcing substantial yen depreciation. The US Treasury's buyback operations cannot be equated with such monetary stimulus, and Washington has not embraced currency depreciation as an acceptable trade-off for maintaining low bond yields.
Barrow highlighted last month's US intervention to support the yen as evidence of this distinction, noting that Washington used euros rather than dollars for that operation to protect the greenback. This approach also shielded Treasury yields, as Japan did not need to sell US debt to acquire the dollars necessary for yen support. He added, however, that the fundamental challenge remains that the US cannot have it both ways.
Forex traders are now looking ahead to Federal Reserve Chair Warsh's upcoming speech at the Jackson Hole symposium later this month. Should he adopt a hawkish tone that pushes back against market expectations for rate cuts, the dollar could find some temporary relief. Daniela Hathorn, senior market analyst at Capital.com, noted that Warsh's perspective on persistent inflation, recent rises in long-end yields, and the future size and role of the Fed's balance sheet could trigger significant repricing across Treasuries, the dollar, gold, and equities. Conversely, if the Fed resists pressure to hike rates, the narrative of dollar depreciation may gain further traction.
Sentiment in the options market toward the dollar has already reached its most pessimistic level since February, with traders positioning for additional downside even as spot prices decline. Brooks underscored the gravity of the situation, stating that once a currency enters a depreciation spiral, stabilizing it can become exceedingly difficult.
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