The US Dollar Index (DXY) fell to near 98.80 during Asian trading hours on Monday, marking a decline to three-month lows as markets reacted to the US Treasury's announcement to double its long-end bond buybacks to $4 billion per operation in an effort to cap surging 30-year yields [1]. This move, confirmed by Treasury Secretary Scott Bessent, came after the department pledged to at least double the size of its buybacks of longer-dated debt, aiming to rein in bond yields [1][2][3]. However, according to Marc Chandler, chief market strategist at Bannockburn Global Forex, these efforts have undermined the dollar without significantly impacting yields, as 'the market is pushing back' [1].
Strategists at Scotiabank argue that the current US policy mix, which seeks to suppress long-term yields, leaves the dollar particularly exposed to fiscal concerns, reinforcing the view that the USD will remain under pressure as fiscal uncertainty persists [1]. Recent US inflation data show signs of easing, with markets now pricing a 41.0% chance of a Fed rate hike at the upcoming policy meeting, down from 47% a month earlier, according to the CME FedWatch Tool [1][3]. Fed's Musalem flagged upside inflation risks, warning that underlying inflation is stuck around 2.5%-3% and that hiking now could avert more aggressive action later, though the overall policy stance remains neutral [1].
The weakening US Dollar has had notable effects on major currency pairs. The USD/JPY pair traded around 158.80, extending losses as the Japanese Yen strengthened on stronger-than-expected inflation data in Japan, which has increased expectations for a Bank of Japan rate hike as early as September [2]. Scotiabank strategists noted that the latest Japanese inflation release added conviction that the BoJ will tighten next month, with 20bps of hikes reflected in swaps, and the JPY rose 0.4% against the USD on the day [2]. Technical analysis indicates a bearish near-term tone for USD/JPY, with resistance at 159.03 and 160.13, and the pair appears vulnerable to further declines [2].
In the USD/CAD market, the pair struggled to capitalize on a bullish gap opening, trading just below 1.3800, up nearly 0.30% for the day, after snapping a three-day losing streak to a three-month low [3]. The US Dollar's weakness, driven by diminished odds for a Fed rate hike and the Treasury's bond buyback announcement, capped gains in the USD/CAD pair despite concerns about a deepening US-Canada trade war and a modest pullback in crude oil prices [3]. Technical analysis shows a bearish bias for USD/CAD beneath the 200-day SMA at 1.3844, with resistance at 1.3815 and support at 1.3698 [3].
Geopolitical tensions also played a role, as Treasury Secretary Bessent was scheduled to announce what he called the toughest sanctions in history on Iran, with traders watching for potential action against China [1][3]. Iranian officials warned of severe retaliation, including halting oil exports through the Strait of Hormuz, which could boost safe-haven demand for the USD and crude oil prices [1][2][3].
CONCLUSION
The US Dollar's decline to multi-month lows is primarily attributed to the Treasury's aggressive bond buyback strategy and persistent fiscal concerns, which have outweighed any safe-haven flows from geopolitical tensions. While technical and fundamental pressures keep the USD under pressure against major currencies like the JPY and CAD, ongoing uncertainty around US fiscal policy and global risks may continue to drive volatility in currency markets.