The Euro (EUR) climbed sharply against the US Dollar (USD) on Wednesday, with the EUR/USD pair reaching its highest level since June and trading around 1.1653, up 0.68% on the day [1]. This move was driven by a significant decline in US Treasury yields following the US Department of the Treasury's announcement to at least double the size of its liquidity-support buyback operations for longer-dated nominal coupon securities, specifically in the 10-year to 20-year and 20-year to 30-year sectors. The maximum size of each operation will increase from $2 billion to at least $4 billion [1].
As a result of the Treasury's announcement, long-term US Treasury yields fell sharply, with the 30-year Treasury yield dropping by around 9 basis points to near 5.20%, after having risen above 5.30% on Tuesday, which was its highest level since 2007 [1]. The US Dollar Index (DXY), which measures the Greenback against a basket of six major currencies, traded near 99, down 0.65% on the day and touching its lowest level since June 1 [1].
The US Dollar was already under pressure earlier in the day due to softer US economic data in recent weeks, which led traders to scale back expectations of a Federal Reserve interest-rate hike at the upcoming meeting [1]. Market participants are now turning their attention to the minutes of the Federal Open Market Committee’s (FOMC) July meeting for further guidance on the monetary policy outlook [1].
In contrast, markets widely expect the European Central Bank (ECB) to raise interest rates in September amid ongoing concerns over energy-driven inflation [1]. The final reading of the Eurozone Harmonized Index of Consumer Prices (HICP) showed inflation rose 0.2% month-on-month in July, unchanged from the preliminary estimate, while core HICP inflation was confirmed at 2.5% year-on-year [1].
CONCLUSION
The Euro's rally to June highs was fueled by a sharp drop in US Treasury yields and a weaker US Dollar following the Treasury's expanded buyback operations. With the ECB expected to raise rates and US rate hike expectations fading, the market focus now shifts to upcoming FOMC minutes for further policy direction.