Dollar: Buyback Impact Limited—BNY Mellon

BNY Mellon strategist Geoff Yu says that despite the Treasury's recent expansion of its debt buyback program, the direct impact on the dollar remains limited. He notes that cross-border dollar exposures have stabilized, FX hedging activity is largely unchanged, and equity holdings have ticked up alongside improved risk sentiment. In comparison, the Fed's July rate decision carries far more weight for currency markets than the current buyback operations.

**Buyback Impact Overstated; Fed Remains the Key Driver**

Markets had worried that the Treasury's doubling of buybacks—from $20 billion to $40 billion—could undermine confidence in the dollar and trigger selloffs. Yu's analysis, however, suggests the move is more of a liquidity management tool and has not materially altered investor hedging behavior. The dollar is currently functioning more as a "release valve"—when Treasury yields fail to fully absorb market concerns over fiscal sustainability and inflation, pressure vents through dollar depreciation. That said, he emphasizes that diversification away from US assets remains selective, not a broad-based exodus.

**Dollar Index Extends Weakness; Further Downside Near Term**

The dollar index continues to soften, trading around 98.96. Scotiabank strategists had previously noted that after the buyback announcement, the index fell to its lowest level since mid-June, potentially paving the way for an additional 1%–1.5% decline in the near term. Market focus now shifts to the Fed's next policy signals, especially with easing inflation and a cooling labor market—the probability of a September rate hike has already fallen below what markets are pricing in.

**Fiscal Sustainability Concerns Are the Deeper Pressure Point**

While the buyback program is designed to soothe markets, the underlying issues remain unresolved. US debt has surpassed $40 trillion, and the deficit is approaching 6% of GDP. Investor skepticism over fiscal sustainability is what's really driving long-term yields higher and, in turn, weighing on the dollar. Without credible deficit reduction measures, any buyback effort may be viewed merely as a stopgap to manage market stress—not a substantive fix for public finances.