Dollar hugs three-month lows as Treasury seeks to calm the bond market

The US dollar has hit its lowest point in three months, driven by the US Treasury's efforts to ease the bond market. The dollar index, which assesses the US currency against six others, stood at 98.938, near its lowest since mid-May. Meanwhile, the euro gained strength, trading at $1.1676, its highest level since late May.

In response to a significant bond sell-off, the US Treasury announced plans to double liquidity support for buyback operations on longer-dated bonds. This move comes after the 30-year Treasury yield surged to a 19-year high of 5.337%. Analysts noted that the Treasury was removing longer-duration bonds from the market while issuing more short-term bills, which put downward pressure on long-term yields without the Federal Reserve expanding its balance sheet.

While this action is not formal quantitative easing or yield curve control, it signifies Washington's willingness to counter rising term premia. Market experts view this as a temporary measure to stabilize the market, highlighting the era of fiscal dominance and modern monetization. The Federal Reserve, however, remains impotent in influencing long-term rates. Consequently, the Treasury is set to issue more short-term debt due to reduced demand for long-term debt.

Inflation concerns escalated during the Federal Reserve's recent meeting, with several policymakers ready to raise interest rates. Many believed that a hike in borrowing costs would be necessary if inflation fails to subside to the US central bank's 2% target. The Japanese yen slipped to 158.32 per dollar, moving away from the 160 level after capitalizing on joint intervention gains from late July. The British pound closed at $1.3603, while the Swiss franc reached its highest point in two months at 0.7981 per US dollar.