US Dollar: Treasury twist signals structural risks – Commerzbank

Commerzbank’s Volkmar Baur notes the US Dollar remains under pressure as EUR/USD trades around 1.17 following the US Treasury’s expansion of its Liquidity Support Buyback Operations. He compares the move to Operation Twist, arguing its impact on long-term yields should be modest but highlighting that the Treasury appears willing to tolerate a weaker Dollar to contain rates, adding a structural risk for USD.

Treasury buybacks and USD vulnerability

"The US dollar remains under pressure. After losing about 0.8% on a trade-weighted basis on Wednesday following the US Treasury’s announcement that it planned to buy more long-term bonds, the dollar stabilized over the course of yesterday; however, EUR/USD still rose above 1.17 for the first time since May. And this level is once again in focus this morning."

"The expansion of the purchase program is therefore more comparable to “Operation Twist,” in which the Fed swapped long-term bonds for short-term bonds in 2011–12 to lower interest rates at the long end of the yield curve. At that time, the Fed sold short-term bonds (with maturities of up to 3 years) totaling USD 667 billion to purchase bonds with maturities ranging from 6 to 30 years. The program ran for a total of 15 months, amounting to USD 44.5 billion per month."

"At the time, it was estimated that Operation Twist (or the MEP, Maturity Extension Program) would lower the current yield on 10-year Treasury bonds by about 23 basis points. The impact of the expansion of the Liquidity Support Buyback Operations is therefore likely to remain modest as well."

"For the US dollar, there are ultimately two takeaways: First, the US Treasury appears to have a breaking point beyond which it is willing to intervene in the market to support interest rates, at least at the long end. When Warsh says that the market should do part of the job of fighting inflation, but the Treasury then intervenes when interest rates rise, one naturally wonders who is supposed to tackle inflation at that point."

"And second, and this is probably more important, Wednesday’s episode shows that if faced with the choice between accepting higher interest rates or a weaker US dollar, the Treasury would rather see a weak USD."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)