The Euro (EUR) climbed to its highest level in three months against the US Dollar (USD) on Thursday, trading just above 1.1700 after a sharp 1.13% surge from Wednesday’s lows [1]. This rally was triggered by the US Treasury Department’s announcement on Wednesday to double the size of its liquidity support buyback operations for longer-dated government bonds, increasing the maximum size from $2 billion to at least $4 billion per operation starting September 9 [1]. The move aims to ease yields on long-term government bonds, which have been under pressure following Treasury Department data showing that US national debt has surpassed $40 trillion, leading investors to demand higher compensation for holding US debt [1].
Analysts at MUFG noted that the buyback announcement, combined with recent FIMA report comments to Japan following intervention, could prove 'counter-productive' for the US Dollar. They warned that it may reduce appetite for holding US assets or exposure to the US Dollar, or both [1]. MUFG further cautioned that even if the Treasury buyback plan manages to contain yields, the US Dollar remains more vulnerable to the downside due to potentially lower yields [1].
The Treasury’s announcement overshadowed the release of the Federal Reserve’s latest monetary policy meeting minutes, which showed a hawkish tone with policymakers emphasizing the need for higher rate hikes unless inflationary pressures subside. However, this hawkish stance failed to prevent the Dollar from selling off in response to the Treasury’s actions [1].
The Euro’s strength comes amid its status as the second most heavily traded currency in the world, with EUR/USD being the most traded currency pair, accounting for an estimated 30% of all foreign exchange transactions [1].
CONCLUSION
The US Treasury’s decision to expand bond buybacks has significantly weakened the US Dollar, propelling the Euro to three-month highs. Despite a hawkish Fed, analysts see increased downside risk for the Dollar, suggesting continued vulnerability in the near term.