Citigroup analysts believe that Treasury Secretary Scott Bessent's latest push to cap long-term borrowing costs could leave the U.S. dollar vulnerable in the near term.
The Treasury's announcement on Wednesday to expand buyback operations for 10- to 30-year notes pushed long-dated yields lower and dragged the dollar to its weakest level since mid-May. In a research note, strategists led by Dirk Willer argued that efforts to suppress yields are likely to keep the currency under pressure. "The main cost of lowering rates in this way is a weaker currency," they wrote.
To navigate this scenario, the bank is advising clients to use the dollar as a funding currency for bets on high-yielding emerging market currencies, which they say "should also perform well in the current environment." This marks a shift from the firm's prior preference for the Canadian dollar and the Swiss franc as funding vehicles.
The strategists also see scope for gold to climb higher, while recommending an end to underweight duration positions, citing tighter control over the long end of the curve and expectations that the Federal Reserve will hold rates steady over the next two meetings. "At this stage, investors may need to unwind steepener trades and instead repurchase gold while selling the dollar," they noted.
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