Dollar: US Treasury Curve Distortion Signals Structural Risk – Commerzbank

Commerzbank analyst Volkmar Baur's latest view suggests that the U.S. Treasury's recent expansion of its liquidity-support buyback operations is sending a clear signal to the market: U.S. authorities appear willing to tolerate a weaker dollar to curb the continued rise in interest rates. This policy inclination is likened to a historical "operation twist," leading to the assessment that the dollar faces structural downside risk. As a result, EUR/USD is currently trading around 1.16979, with the dollar remaining under pressure overall.

**Policy Intent: Tolerating a Weaker Dollar to Stabilize Long-End Rates**

Baur notes that while the direct impact of the Treasury's operations on long-term yields may be limited, the underlying policy intent is more critical. The move indicates that, in response to bond market pressure, the U.S. Treasury is choosing to intervene through measures such as adjusting the debt maturity structure, rather than relying solely on Federal Reserve monetary policy. This stance is interpreted by the market as an openness among policymakers to a degree of dollar weakening as a supplementary means of easing tightening financial conditions. This forms a subtle contrast to the "strong dollar" policy historically emphasized by the U.S. government, thereby undermining the fundamental basis for a long-term bullish dollar outlook.

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Market Impact: EUR/USD Gains Support

Against the backdrop of the above policy interpretation, the EUR/USD exchange rate has found support near the 1.17 level. Although fluctuations in U.S. Treasury yields provide the dollar with a degree of rate advantage, market concerns over the dollar's structural risk prevail. According to Commerzbank's analysis, as long as the U.S. Treasury maintains this strategy of influencing the yield curve by managing debt supply, the dollar may continue to face downward pressure. This provides a rebound window for major non-USD currencies such as the euro, particularly given the relatively stable policy stance of the European Central Bank.

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Risk Note: Watching Next Policy Signals

It should be emphasized that the current weakness of the dollar stems more from policy signals and expectations rather than given a fundamental reversal in economic fundamentals. The future trajectory of the dollar will heavily depend on the next operational details of the U.S. Treasury and the degree of courteasing from the Federal Reserve. If long-term yields are effectively contained and inflation expectations remain unanchored, the "weak dollar" strategy could continue. Conversely, if market concerns over U.S. debt sustainability escalate, triggering an disorderly decline in the dollar, it could lead to significant instability across financial markets. Investors should closely monitor the Treasury's debt issuance plans and official statements regarding the dollar's exchange rate.