NEW YORK: The dollar weakened against major currencies on Wednesday after the US Treasury Department announced it plans to double liquidity support buyback operations for longer-dated bonds.
The euro rose 0.87 percent against the dollar to USD1.1676, hitting its highest level in more than 2-1/2 months. Sterling was 0.68 percent higher against the dollar at USD1.3625, rising to its highest since May 11.
The announcement suggests an expansionary monetary policy and the availability of more dollars in the market, which is causing the US currency to depreciate, said Juan Perez, director of trading at Monex USA.
It makes sense for the dollar to depreciate since this is on top of other themes that have been negative for the dollar including a Federal Reserve that is not going to be communicative and no progress on the Middle East tensions,” Perez said.
Long-term Treasury bond yields fell following the announcement, with the 30-year bond yield dropping almost 10 basis points to 5.1942 percent. The yield on benchmark US 10-year notes fell 5.74 basis points to 4.649 percent.
The US Treasury said the change will be effective between September 9 and November 4. “Treasury would have to issue more treasury bills to finance the removal of duration from the market,” said Deutsche Bank analyst George Saravelos in an investor note. “To the extent that this eases financial conditions, it would arguably necessitate an offsetting tightening from the Federal Reserve.
If Chair Warsh does not recognize the buyback as a factor driving an easing of financial conditions, we would take it as an additional dollar negative driver.” The dollar weakened 1.42 percent to 0.802 against the Swiss franc , hitting its lowest since mid-June.
Markets are also eyeing minutes from the Fed’s last policy meeting to better understand officials’ thinking on interest rates. The Fed minutes are set to be released at 2 p.m. ET (1800 GMT) on Wednesday. Data released during recent weeks pointed to a softer US economy, including unexpected job losses in July and mild inflation readings, leading investors to scale back rate-hike bets.
“There’s this belief that there’s not going to be much hawkishness in there or much detail about hiking for the remainder of the year. That hurts the dollar as well,” Perez said. The Japanese yen strengthened 0.77 percent to 158.36 per dollar, pulling away from the closely watched 160 level after giving back much of its intervention gains.
The dollar index, which measures the US currency against six major peers, was down 0.72 percent at 98.93, dropping to its lowest since late May.
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