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

The US dollar suffered significant losses on Thursday, settling close to three-month lows as the US Treasury announced measures to calm the bond market. The dollar index, which gauges the US currency against six others, was at 98.938, near its lowest since mid-May. The euro held steady near US$1.1676, its highest point since late May.

The Treasury's plan to double liquidity support buyback operations for longer-term bonds followed a sharp bond sell-off, driving the 30-year Treasury yield to a 19-year high of 5.337%. Analysts noted that while the move wasn't formal quantitative easing or yield curve control, it signaled Washington's willingness to counter rising term premia.

This approach, described as a temporary remedy, reflects a period of fiscal dominance and modern monetization, where the Treasury is issuing more short-term debt due to weak demand for long-term bonds. Even if the Federal Reserve raises interest rates, the Treasury's actions effectively inject additional short-term money into the economy.

Concerns about inflation intensified after a Fed meeting last month, with several policymakers considering rate hikes and many emphasizing the need for borrowing costs to rise if inflation does not fall to the 2% target. The Japanese yen traded at 158.32 per dollar, moving away from the 160 level after regaining some gains from the end of July intervention.

The British pound was at US$1.3603, while the Swiss franc neared a two-month high at 0.7981 per US dollar.