US dollar at 3-month low as Treasury moves to soothe bond jitters

The U.S. dollar was pinned near a three-month low on Thursday after the Treasury Department moved to calm a bond market selloff that had pushed long-end yields to their highest since 2007, lifting risk sentiment and undercutting the currency. The dollar index, which measures the dollar against six other currencies, fell to 98.558, its lowest level since May ‌14. The euro rose to $1.1710, ⁠the highest ⁠level since mid-May. ING global head of markets Chris Turner said the Treasury's move to increase buybacks of Treasury securities with maturities between 10 and 30 years should reassure markets that longer-dated bonds are unlikely to face a disorderly selloff.

"It reduces one of those left-field risks out there which is good for risk, good for ​the investment environment and slightly dollar negative," Turner said. Investors have been grappling this week with a sharp selloff in the global bond market on mounting concern about soaring government debt and the spectre of higher oil prices due to the lack of progress in ending the U.S.-Israeli ​war with Iran.

The 30-year Treasury yield rose to a 19-year high of 5.337% earlier this ⁠week. It ‌was last at 5.22% after dropping 9 basis points following the move by the Treasury that effectively shifts more of the government's borrowing toward short-term bills. The move by the Treasury suggests that it is attempting to manage long-term rates because ⁠the market is questioning the Federal Reserve's commitment to fighting inflation and the sustainability of U.S. fiscal policy, according to Shaun Osborne, chief FX strategist at Scotiabank.


"If yields can't fully take ​the strain from those concerns, the dollar will have to," Osborne said.

"The dollar debasement trade is making a comeback."

FED MINUTES

Concern about inflation deepened at the Fed's meeting last month, with several policymakers ready to raise interest rates and many saying a hike in borrowing costs would be needed if inflation did not decline to the U.S. central bank's 2% target, the minutes of the session showed, although new chair Kevin Warsh has been reluctant to talk about the path of monetary policy on his watch.

The Kansas City Fed's Jackson Hole Symposium now beckons, where ‌investors will be looking for more clues on the Fed policy outlook under Warsh.

"The Jackson Hole Symposium next week feels more pivotal than ever," said Jonathan Pryor, head of private markets & co-head of dealing at Marex FX. "As ​Warsh's first, it comes ​against the backdrop of what the Treasury ⁠is doing, what the White House is saying and Warsh having to try and stamp his authority on the Committee, and steer rates when he's got competing influences ahead of the midterms."

EYES ON YEN

The broad dollar weakness provided some relief to the Japanese yen as the ​fragile currency pulled away from the closely watched 160 level. It last traded at 158.51 per dollar, surrendering part of its advance from the previous session. The yen has been in the spotlight since a rare coordinated intervention by U.S. and Japanese authorities at the end of July sought to arrest its slide after it weakened to a 40-year trough near 164 per dollar. Sterling rose to $1.3661, its highest in six months, while the Swiss franc was flat at 0.7968 per U.S. dollar, after rising by almost 2% in the previous session.