Following this week's dramatic market turbulence triggered by Washington's announcement of expanded Treasury buybacks, investors are drawing parallels with Japan's policy approach, where measures to suppress borrowing costs ultimately led to a prolonged yen weakness. The dollar now sits at a three-month low and is heading toward its worst weekly performance this month.
In a surprise midweek move, the US Treasury declared it would double the scale of its longer-dated debt repurchases. Robin Brooks, a senior fellow at the Brookings Institution, characterized this as the clearest indication yet that America is following Japan's trajectory toward currency depreciation, warning that the government is "playing with fire."
Treasury prices initially rallied on the news but have since surrendered those gains, while gold and other precious metals climbed higher. Steven Barrow, head of G10 strategy at Standard Chartered, argued that using buybacks to suppress bond yields would merely add downward pressure on the dollar without addressing the root cause of rising yields: the fiscal deficit.
Still, the Bloomberg Dollar Index has only slipped 1% this year, and the comparison between the US and Japan has its limitations. Japan's "Abenomics" under former Prime Minister Shinzo Abe relied on aggressive monetary easing to spur growth, including massive quantitative easing that effectively printed yen to purchase bonds, crush yields, and sharply weaken the currency. The Treasury's buyback program cannot be equated with such monetary stimulus, nor has the US chosen to accept dollar depreciation as the price for lower yields.
Barrow pointed to last month's Washington intervention to support the yen as evidence of this distinction. That operation used euros rather than dollars, shielding the US currency from impact, while Japan avoided selling Treasuries to obtain the dollars needed for intervention, thereby protecting US bond yields as well. "The problem is, the US can't have it both ways," Barrow noted.
Traders are now awaiting Federal Reserve Chair Kevin Warsh's address at the Jackson Hole symposium later this month. Should Warsh strike a hawkish tone, pushing back against market expectations for rate cuts, it could provide temporary relief for the dollar. Daniela Hathorn, senior market analyst at Capital.com, wrote that any clues regarding his views on persistent inflation, recent rises in long-term yields, or the future size and role of the Fed's balance sheet could trigger significant repricing across Treasuries, the dollar, gold, and equities.
However, if the Fed resists pressure to hike rates, the narrative of dollar depreciation could gain further traction. Options markets already show the most bearish sentiment on the dollar since February, and even with spot rates having pulled back, this suggests traders are positioning for additional downside. Brooks from Brookings cautioned that "once a currency enters a depreciation spiral, stabilizing it becomes nearly impossible."
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