US Dollar: Shaky basis trade risks weigh – Commerzbank

Commerzbank's Volkmar Baur discusses the risks and uncertainties surrounding the US dollar, attributing them to recent events and market behavior. The US Treasury Secretary's comments on potential secondary sanctions, combined with the absence of a clear timeline for their implementation, have contributed to the dollar stabilizing but remaining vulnerable.

Falling US yields and vague statements from officials have left investors uncertain, leading to hedge funds engaging in leveraged basis trades in US Treasuries. This behavior, coupled with a significant presence of hedge funds in US Treasury investments, could result in sharp fluctuations and increased selling pressure on US Treasuries.

The recent interventions by the US in the yen and expansion of the buyback program for illiquid long-term Treasury bonds were viewed as precautionary measures to prevent worse outcomes, rather than beneficial actions for the Japanese market or the dollar. The article highlights how sudden interest rate rises can weaken the dollar in the current environment, as demonstrated by the "Liberation Day" incident.

With US debt continuing to grow and the search for new buyers for US Treasuries, the environment for the dollar is not favorable. The upcoming release of the US Personal Consumption Expenditures (PCE) Price Index data and a revision of Q2 GDP figures will provide further insights for investors, while the potential impact of Federal Reserve Chair Kevin Warsh's remarks at the Jackson Hole Symposium remains to be seen.