Euro Surges Higher Against Dollar on US Treasury Buyback Push — Danske Bank

The euro jumped higher against the US dollar after the US Treasury expanded its long-dated Treasury buyback operations, according to analysts at Danske Bank. The move flattened the US Treasury yield curve and pulled the 10-year Treasury yield below Tuesday's high, weakening the dollar's interest rate advantage and providing upward momentum for the euro.

**Treasury buyback operations weigh on the dollar**

The US Treasury's increased scale of long-dated Treasury buybacks this time directly impacted the supply-demand dynamics in the bond market. The buyback operations absorbed long-end bond supply in the market, pushing down long-end yields and narrowing the yield spread between US Treasuries and euro-area bonds. The Danske Bank research team noted that the interest rate differential had previously given the dollar an edge over the euro, and the narrowing spread is now reversing that trend, driving capital flows into euro-denominated assets.

**Rate differentials dominate short-term moves**

Recent fluctuations in the euro versus the dollar have been largely driven by changes in the US-Europe rate differential. Danske Bank said that a widening rate gap early this week had weighed on the euro against the dollar, but as US Treasury yields retreated, the euro quickly recovered lost ground. Market reports indicate that investors are closely monitoring the divergence in policy paths between the Federal Reserve and the European Central Bank, and any factor that narrows the rate spread could continue to support the euro.

**Euro-area asset appeal rebounds**

The decline in US Treasury yields has not only eased pressure on the euro but also boosted the relative appeal of euro-area assets. Reports suggest that European assets are substantial in scale, and US and European financial markets are deeply intertwined, making capital flows highly sensitive to rate spread changes. Danske Bank's view implies that if the Treasury buyback operations continue or are further expanded, the euro could gain more support against the dollar, though the outlook still depends on Fed policy signals and Europe's own economic data performance.