US Dollar Weakens as Treasury Expands Bond Buybacks to Stabilize Markets

The U.S. dollar continued its downward trend on Thursday, hovering near multi-month lows after the U.S. Treasury Department intervened to calm volatility in the bond market. The move successfully lowered long-term borrowing costs, eroding the interest rate advantage that had recently supported the greenback.

The Dollar Index, which measures the currency against a basket of peers, fell 0.13% to around 98.80. This followed a 0.8% decline in the previous session that pushed the index to its lowest point since May 14, 2025.

Treasury Intervention Cools Surging Yields

The dollar's weakness follows a decisive action from Washington to stabilize fixed-income markets. On Wednesday, the U.S. Treasury announced it would double the maximum size of its buyback operations for long-dated government bonds, increasing the cap from $2 billion to at least $4 billion.

This intervention was a response to a sharp sell-off in global bonds, which had been triggered by rising geopolitical tensions in the Persian Gulf and a spike in oil prices. The turmoil pushed the 30-year U.S. Treasury yield to a near 19-year high of 5.337% on Tuesday. Following the Treasury's announcement, the yield retreated to approximately 5.18%, providing relief to risk assets and prompting an unwinding of speculative long-dollar positions.

Market Impact and Analyst View

Analysts at ING noted that the Treasury's move was "warmly welcomed by global investors." However, they cautioned that "a more sustainable recovery in the bond market will still require more structural solutions like fiscal consolidation," even as the signal to monitor long-end yields boosted market sentiment.

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The retreat in U.S. yields and improved risk appetite allowed other major currencies to advance:

• The euro gained 0.2%, climbing to its highest level since May 14, 2025, as traders priced in persistent inflation in the eurozone.
• The British pound rose 0.3% to its strongest point since May 11, 2025, supported by firm UK government bond yields.
• The Japanese yen firmed slightly to 158.43 per dollar, holding onto most of its 1% gain from the prior day.

Caution Lingers Amid Hawkish Fed and Oil Prices

Despite the dollar's slide, a cautious tone persists in the foreign exchange market. Minutes from the Federal Reserve's July meeting revealed that officials remain highly concerned about inflation, with several policymakers open to further interest rate hikes if price pressures do not subside. This hawkish stance is providing a floor for short-term U.S. yields.

Furthermore, elevated energy costs, with Brent crude holding firm near $92 per barrel, continue to pose an inflation risk for net energy importers in Europe and Asia. Investors are now looking ahead to a speech by the Federal Reserve Chair at the upcoming Jackson Hole symposium for further signals on monetary policy.