FX Daily: Much ado about buybacks, softer dollar

The US Treasury's recent bond market interventions have sparked debate, with some critics viewing it as a breach of financial ethics. However, a former Treasury official suggests it was more about signaling than wrongdoing. The main point seems to be the Treasury's focus on raising longer-term Treasury yields. Treasury Secretary Scott Bessent hinted at potential new fiscal consolidation plans, possibly involving a task force to curb fraud, akin to some approaches taken by Elon Musk.

While some doubt this will significantly impact the nearly 6% budget deficit, we'll wait and see what's announced. Comparisons to former President Trump's tariffs in April 2025 are being made, but this week's Treasury buybacks are seen as a softer dollar, pro-risk story rather than a blow to US policy credibility. This could lead to a gentler decline in the dollar and benefit high-beta commodity currencies and emerging market currencies.

The DXY remains supported around the 98.65/70 region and may struggle to break above 99.00. For the euro, US fiscal consolidation would be positive for EUR/USD, but given the lack of such moves, a gradual decline in the dollar could be beneficial. The eurozone's August PMI readings are expected to show continued mild expansion, supporting another ECB rate hike in September, with inflation expectations around 2.8%.

Emerging market currencies are performing well, so a continued gentle rise in EUR/USD is favored. The Swiss franc is expected to outperform, potentially pushing EUR/CHF back to 0.9400. The rand is also likely to benefit from the softer dollar and a pro-risk environment. However, concerns about high natural gas prices and potential El Niño drought conditions in the future could impact the rand's performance.