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

The US dollar experienced significant losses on Thursday, settling near its three-month lowest point as the US Treasury Department introduced measures to alleviate concerns in the bond market. Bond yields for longer-term securities had reached their highest levels since 2007, triggering the dollar's decline. The dollar index, a benchmark that compares the US currency against six peers, was at 98.938, representing a low point since mid-May.

The euro stood at US$1.1676, marking its highest level since late May. The US Treasury unveiled plans to double its liquidity support buyback operations for longer-dated bonds after a sharp sell-off in bonds had pushed the 30-year Treasury yield to a 19-year high of 5.337 percent. Analysts noted that while this was not formal quantitative easing nor yield curve control, it was a clear indication that Washington was prepared to counter rising term premia.

The move was described as a temporary measure that showcased an era of fiscal dominance and modern monetisation. The Federal Reserve was seen as impotent in impacting long-term rates, with the Treasury stepping in to inject additional short-term debt into the economy. Concerns about inflation were mounting, with several policymakers prepared to raise interest rates and several suggesting that borrowing costs would need to increase to keep inflation in check at the Fed's 2 percent target.

The Japanese yen traded at 158.32 per dollar, moving away from the 160 level after giving back much of the gains from a joint intervention at the end of July. Meanwhile, the British pound was trading at US$1.3603, and the Swiss franc was near a two-month high at 0.7981 per US dollar.