US Dollar: Debasement worries weigh after buyback – Scotiabank

Scotiabank strategists Shaun Osborne and Eric Theoret have noted that the US Dollar (USD) is currently experiencing a weakening trend, reaching its weakest level since mid-June. This decline is attributed to markets reacting to the US Treasury's decision to double bond buybacks, which is seen as an attempt to manage longer-term yields amid uncertainty surrounding the Federal Reserve's inflation control measures and the sustainability of US fiscal policy.

The US Dollar Index (DXY) is projected to drop between 1-1.5% in the near term as a result. Markets are reacting to this unexpected move, with stocks mixed, crude oil prices stronger, and major bond markets slightly weaker. The Treasury's decision came just two weeks after its latest quarterly refunding announcement and a few hours before a 20-year Treasury auction.

Although this move is primarily a liquidity management issue, it has raised concerns about the Treasury's ability to address the rising term rates and potential concerns over the sustainability of US fiscal policy. The dollar debasement trade is making a comeback, with the DXY extending its losses through the 50% retracement of its H1 gains, potentially leading to a further decline of 1-1.5% in the near term.