Dollar Drops to May Lows After Treasury Doubles Bond Buybacks

The US dollar hit its lowest level since May on Wednesday after the Treasury said it would double long-term bond buybacks to $4 billion starting Sept. 9. The move sent Treasury yields lower and drew comparisons to Japan's currency intervention tactics.

A 5.3% yield on the 30-year bond has become a pain threshold for the Treasury, just as 164 on USD/JPY was for Tokyo, traders said. The parallels go further.

The dollar's slide against the yen defies the fundamental picture. The wide rate differential between the Fed and the Bank of Japan means the yen is still being sold as a funding currency in carry trades. Tokyo has to pick its moments and spend money to cool USD/JPY bulls. The Treasury is doing the same thing, traders said.

The rally in Treasury yields is not just about fiscal stimulus and the widening budget deficit. Geopolitics and AI competition are also pushing debt yields higher. Hyperscalers are raising funds for AI projects through corporate bonds. Alphabet's debt maturing in 2075 carries a coupon around 6.8%. Those returns are pulling money away from Treasuries, which get sold off, pushing yields up.

In forex markets, the view is that USD/JPY bears cannot hold their gains without Bank of Japan support through coordinated intervention. That means the BoJ must tighten faster, raising the overnight rate every three months instead of every six, traders said. Or signal a terminal rate well above current levels, at least 2.5%.

For the Fed, there is a contradiction. The July FOMC minutes showed more officials ready to vote for tighter policy. The tone was hawkish. A weaker dollar requires the Fed to be reluctant to raise rates. Citigroup said the main cost of the Treasury's bond-yield control efforts is a weaker dollar.

The dollar index fell 0.6% on the session, its biggest single-day drop in three weeks. The 30-year yield closed at 5.21%, down 12 basis points from the previous day.