Dollar Rises as Fed Outlook Mulled

The dollar index traded around 98.8 on Friday and was on track to lose nearly 1% for the week, as the US government’s bond buyback plan heightened market volatility and boosted demand for safe-haven metals and other currencies at the expense of the greenback. The dollar index fell sharply on Wednesday after the US Treasury Department announced larger debt buybacks aimed at containing borrowing costs. Long-term Treasury yields initially declined on Wednesday before rebounding a day after amid concerns that the government’s plan may provide only a temporary solution. The market moves underscored concerns over rising US government debt, making the dollar less attractive to investors. Meanwhile, higher oil prices as the US prepares sweeping new economic sanctions against Iran also added to inflation concerns.

The dollar index held around 98.8 on Thursday, hovering near its lowest level in three months as the US government moved to contain long-term borrowing costs by expanding its bond buyback program. The US Treasury Department said it would at least double the size of liquidity-support buyback operations covering securities with maturities from 10 to 30 years, as the recent surge in yields heightened concerns over market liquidity and stability. The move signaled that the US Treasury was prepared to take a more active role in the bond market to limit long-term yields, potentially improving dollar liquidity across the global financial system. Meanwhile, minutes from the Federal Reserve’s July meeting confirmed that some policymakers favored raising interest rates this year to prevent stronger inflationary pressures from emerging later. Elsewhere, heightened uncertainty in the Middle East, with the US and Iran remaining at a stalemate, kept inflation risks in focus.

The US dollar index fell below 99 on Wednesday, the lowest since late May, after the US Treasury announced it would double its long-term buyback program. The move signaled that the US Treasury would be willing to actively intervene on the bond market to cap long-term yields, raising the outlook of dollar liquidity in the global financial system from the Treasury General Account. Such measures were in line with earlier efforts to limit the surge in long-dated bonds globally, which often drive foreign companies to sell their dollar holdings to support their currency. Japan and the US had recently intervened in foreign exchange markets, driving the dollar index to plunge, and Treasury Secretary Bessent called for higher limits to the Federal Reserve's FIMA facility for foreign countries to have dollar liquidity without having to actively intervene in foreign exchange markets. Meanwhile, FOMC minutes confirmed that some members see the case for higher rates.