Citigroup's currency strategy desk has shifted to a bearish near-term stance on the US dollar, slashing its three-month forecast for the dollar index to 98.34 from 102.12.
The reversal is driven by a confluence of three key pressures: an expanded US Treasury bond repurchase program, fading expectations for Federal Reserve interest rate hikes, and rising political uncertainty ahead of the midterm elections.
In a Thursday research note, the team led by Daniel Tobon characterized the Treasury's decision to broaden its debt buyback operations as "another negative factor for the dollar." Concurrently, the bank raised its three-month euro forecast to 1.1750, citing expectations that the European Central Bank will deliver a 25-basis-point rate hike in September, even as market bets on Fed tightening continue to shrink.
As reported earlier, following the coordinated US-Japan intervention in the yen, Treasury Secretary Bessent's latest move involves scaling up US debt repurchases. The Treasury has announced it will "at least double" the size of buybacks for 10- to 30-year maturities. During Friday's Asia-Pacific trading session, the dollar index was hovering near 98.8, with the euro trading around 1.168 against the greenback.
The immediate catalyst for Citigroup's repositioning was the Treasury's announcement that it would double its repurchase volume for long-dated bonds before November. The strategists noted 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, the operation exerts downward pressure through two distinct channels: first, by pushing US Treasury yields lower, and second, by stoking market concerns about financial repression. The expanded buyback program comes against a backdrop of rising US government borrowing costs, with August's 10-year and 30-year bond auctions both clearing at their highest yields since the 2000s.
Beyond the Treasury's actions, Citigroup strategists pointed out that the Fed rate-hike expectations which had previously bolstered the dollar are now being priced out by the market. On the political front, the team cautioned that investors may look to reduce long dollar positions as the November midterm elections approach, citing "elevated US political uncertainty and the tail risk of electoral disputes."
Despite the near-term bearish turn, Citigroup has not altered its long-term assessment of the dollar, maintaining 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 surge in artificial intelligence-related capital expenditures could reignite inflationary pressures, potentially prompting the Fed to resume rate hikes and challenging the bearish dollar thesis.
Market risks and disclaimers: Markets carry risks, and investment requires caution. This article does not constitute personal investment advice and does not account for individual investors' specific objectives, financial circumstances, or needs. Investors should consider whether any opinions, views, or conclusions herein align with their particular situation. Investment decisions made based on this content are at the investor's own responsibility.
Comments