US Dollar: Yield management weighs on currency – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad notes the US Dollar (USD) is weaker against all major currencies as longer-term US Treasury yields edge lower following buyback plans. Haddad argues expanded buybacks and fiscal messaging may cap long-end yields but at a credibility cost for the USD. Upcoming US August PMI will test whether the US growth advantage can still offer the Dollar near-term support.

Treasury actions pressure the Dollar

"USD is down against all major currencies, global stocks and bonds are up, while the rally in crude oil prices stalled. Longer term Treasury yields edged a bit lower after yesterday’s rise with 30-year yields modestly below Wednesday’s buyback announcement levels."

"Yesterday, Treasury Secretary Scott Bessent warned the buyback operation could be larger than the $4bn announced, while touting the “big toolkit” at his disposal to tame the Treasury market. Bessent also attempted to ease concerns over US fiscal policy noting the White House would announce at the end of this week or early next week “an increased focus on fiscal consolidation.”"

"The Congressional Budget Office (CBO) offers little evidence of fiscal consolidation, projecting historically large budget deficits and debt rising to a record 120% of GDP by 2036. Without credible spending cuts or revenue increases, the White House plan risks being little more than putting lipstick on a pig. "

"Regardless, the boost to the Treasury’s buyback operation and the threat of more measures should help cap long-end Treasury yields. But the relief comes with a credibility cost that translates to a weaker USD. The Treasury’s intervention blurs the lines between improving market functioning and suppressing borrowing costs to contain fiscal stress."

"The US August PMI will test whether the US growth advantage relative to other major economies remains intact (2:45pm London, 9:45am New York). If so, the data can offer USD some near-term support, while signs the US growth edge is narrowing would deepen its losses."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)