The sell-off extends a rough August for the dollar, which has weakened as traders price in the fiscal and monetary implications of the Treasury’s buyback program. Bessent’s comments Thursday came just a day after the department surprised markets by pledging fresh buybacks, catching positioning offside and forcing a repricing across major currency pairs.
Why Treasury Buybacks Pressure the Dollar
When the Treasury repurchases longer-dated government debt, it effectively removes duration from the market and injects liquidity. That can push down long-end yields and reduce the relative attractiveness of dollar-denominated assets — a dynamic that weighs on the currency when other central banks hold rates steady or tighten.
Bessent told reporters he may increase the government’s repurchases of Treasuries further, framing the program as a liquidity management tool. But markets read the expansion as a signal that the Treasury is concerned about demand at the long end, where issuance has ballooned to fund persistent deficits. The combination of heavy supply and official buying creates a distorted curve that traders say favors the euro and yen over the dollar near term.
Euro and Yen Capitalize on Dollar Weakness
The euro pushed the dollar to its weakest level since May, with EUR/USD reclaiming ground that had been lost during the spring when U.S. yield differentials favored the greenback. European fixed income offers lower nominal yields, but the prospect of reduced U.S. long-end returns narrows the gap that had underpinned dollar demand.
The yen strengthened separately after Japanese inflation data accelerated, reinforcing expectations that the Bank of Japan will continue normalizing policy. Faster core inflation in Tokyo gives policymakers cover to raise rates again, tightening the yield differential that has long penalized the Japanese currency. Dollar/yen slipped as traders trimmed bets that the BOJ would stay on hold indefinitely.
Jackson Hole Looms Over Currency Markets
Fed Chairman Warsh is scheduled to speak at the Kansas City Fed’s annual Jackson Hole symposium next week, an event that has historically moved currency markets when policymakers signal shifts in rate trajectory. With the dollar already on the back foot from the Treasury’s buyback announcement, Warsh’s tone on inflation, growth, and the timing of any further easing will determine whether the dollar stabilizes or extends losses.
Traders will parse the speech for any acknowledgment that long-end yield dynamics are complicating monetary transmission. If Warsh signals comfort with the curve, the dollar could recover as rate differentials reassert themselves. A more cautious tone, however, would amplify the pressure created by the Treasury’s buyback expansion.
What Happens Next
Watch the long end of the Treasury market for confirmation that buybacks are reshaping demand. If 10- and 30-year yields continue to compress relative to the front end, the dollar’s yield advantage erodes further and the euro’s August rally has room to run. Conversely, a hawkish Jackson Hole surprise from Warsh could unwind the move quickly by re-establishing the rate differential that has supported the dollar for most of the past two years.
Bessent’s next public comments on the buyback program will also be closely watched. Any concrete timeline or size commitment for expanded repurchases would give traders a clearer framework for pricing the dollar’s structural drag, while ambiguity keeps the market in a reactive posture. In the meantime, the yen’s inflation-driven bid adds a second front of pressure — a coordinated weakening of the dollar against both major counterparts would mark a meaningful shift in the currency regime that has dominated since 2022.
— Hiro Tanaka, markets desk, AXO News