As markets gradually digest expectations of a more dovish Federal Reserve stance, midterm election factors, and reports that the US Treasury may expand its debt buyback efforts, Citi Group's foreign exchange strategy team has recently turned bearish on the dollar's short-term trajectory.
Led by Daniel Tobon, Citi strategists lowered their three-month dollar index forecast from 102.12 to 98.34 in a Thursday research note. This adjustment follows the team's earlier warning that Treasury Secretary Scott Bessent's latest move to curb long-term borrowing costs—namely expanding the buyback scale for 10-year to 30-year Treasuries—would likely come at the expense of a weaker dollar. On Wednesday, the dollar index touched its lowest level since May.
Tobon and his team noted they had maintained a "relatively neutral" stance on the greenback in recent months but cautioned that risks could intensify in the period ahead. "The latest variable is the Treasury's recent announcement to double the size of its buyback program by November. This adds new bearish factors for the dollar through two channels: first, by suppressing Treasury yields; second, by stoking concerns over financial repression policies," they wrote in the report.
The Treasury's buyback initiative follows fresh signs of persistently rising government borrowing costs—both the 10-year and 30-year auction awards in August cleared at yields not seen since the early 2000s. The strategists also pointed out that traders have trimmed expectations for Fed rate hikes, a sentiment that had previously fueled bullish momentum for the dollar.
Looking ahead, they believe the market may avoid dollar long positions ahead of the November midterm elections, "due to rising US political uncertainty and tail risks tied to election disputes that cannot be overlooked." Nevertheless, the team has not altered its long-term view on the dollar, still seeing US growth prospects as superior to other G10 members. They mentioned that the US-Iran conflict and the artificial intelligence (AI) investment boom could pose upside risks to their new forecast.
In recent months, reduced oil shipments through the Strait of Hormuz, coupled with a surge in AI-related capital spending, have stoked inflation concerns that could prompt the Fed to resume rate hikes. Additionally, the strategists raised their three-month euro-dollar forecast to 1.1750, driven by expectations of a 25-basis-point rate hike by the European Central Bank in September and a pullback in market pricing for Fed rate increases.
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