US dollar hits 3-month low against euro, pares losses after Treasury move

LONDON - The US dollar fell to a three-month low against the euro on Aug 20 before paring losses after the Treasury Department moved to calm a bond market sell-off that had pushed long-end yields to their highest level since 2007.

The Treasury said on Aug 19 it would double the size of its buybacks of 10- to 30-year debt to at least US$4 billion (S$5 billion) per operation, an attempt to steady a market that had been rattled by concerns over the growing US fiscal deficit.

The announcement triggered a sharp sell-off in the US currency as traders worried about a worsening fiscal picture and potentially higher inflation, boosting gold and bitcoin in what some call the “debasement trade”.

The US dollar index, which measures the greenback against a basket of currencies including the yen and the euro, was last down 0.01 per cent at 98.82, with the euro up 0.01 per cent at US$1.1678.

The single currency earlier reached US$1.171, the highest since May 14.

The Japanese yen weakened 0.38 per cent to 158.75 per US dollar.

Markets pushed back against the Treasury’s move on Aug 20, with yields renewing their climb higher, said Sarah Ying, head of FX strategy at CIBC Capital Markets.

“This is (Treasury Secretary Scott) Bessent testing the market and the market fighting back,” Ying said.

“It could very well be that we get a little bit more of these announcements in the future, but it doesn’t seem like they are very credible to the market, at least as of right now.”

It was the second time in weeks that Bessent has stepped in to try to counteract market moves, having joined Japan in a July 31 currency market intervention aimed at reversing the yen’s slide to recent 40-year lows against the dollar.

The timing of the buyback announcement on Aug 19 caught many investors off guard, coming soon after the Treasury’s quarterly refunding statement earlier in August and ahead of a 20-year bond auction.

“It looked odd from a timing point of view at least,” said Shaun Osborne, chief FX strategist at Scotiabank.

“Markets are concluding correctly that if the Treasury doesn’t want the bond markets to take the strain from these concerns about fiscal policy sustainability and Fed policy credibility, then the dollar will have to.”

Fed focus

Traders are also focused on an upcoming speech from Federal Reserve Chairman Kevin Warsh at the central bank’s Jackson Hole symposium later in August for clues on how he plans to tackle still-elevated inflation.

Warsh, who took over the Fed in May, unsettled markets after the central bank’s July meeting by offering few clues on how policymakers might respond to persistent price pressures.

“Investors are going to want maybe a bit more from Warsh than a sort of very high-level kind of opaque repeat of, you know, the July FOMC press conference, where he talked a lot without really saying very much,” Osborne said.

Minutes from the Fed’s July meeting, released on Aug 19, showed concern about inflation deepened in July, with “several” policymakers ready to raise interest rates and “many” saying a hike in borrowing costs would be needed if inflation does not decline toward the central bank’s 2 per cent target.

Markets now price in a 35 per cent chance of a September rate hike, rising to 68 per cent by December.

Sterling strengthened 0.23 per cent to US$1.3634 and reached US$1.3659, the highest since Feb 16.

In cryptocurrencies, bitcoin gained 3.47 per cent to US$71,465.81, the highest since June 1. REUTERS