Yen Strengthens on US Treasury Buybacks; Traders Await US PCE Inflation Report

During Wednesday's Asian trading session, the USD/JPY pair came under pressure and moved lower, after briefly touching the 158.90 level, and is now trading around 159.04. The news that the US Treasury has launched a bond buyback program weighed on the US dollar, while markets remained cautious ahead of key US inflation data, together driving the yen higher in the short term.

**US Treasury Buybacks Weigh on the Dollar**

According to reports, the US Treasury plans to use funds from its general account to purchase long-dated Treasuries, and intends to double the quarterly buyback size for 10-year to 30-year bonds starting in September. This move has led to a pullback in US Treasury yields, thereby undermining the dollar's interest rate advantage. However, long-end yields remain elevated, limiting the downside for the dollar. Market reports indicate that 30-year Treasury yields had previously risen to their highest level since 2007, and the trend of a steeper yield curve is still ongoing.

**Markets Focus on PCE and Central Bank Annual Meeting**

Investors' attention is now turning to the upcoming US Personal Consumption Expenditures (PCE) price index for July, which is the Federal Reserve's preferred inflation gauge and will provide important guidance for its next policy moves. In addition, the Fed Chair is scheduled to speak at the Jackson Hole annual meeting on Friday, with markets hoping to glean clues about monetary policy and the recent trajectory of Treasury yields. Analysts believe that as long as Japanese interest rates remain far below those in the US, the yen's weakness is likely to persist.

**Intervention Expectations and Contagion Risks**

Japan has already spent tens of billions of dollars this year in attempts to prop up the yen, but with limited effect. Markets are concerned that if Japan intervenes further, it may need to sell its substantial holdings of US Treasuries, which could push up US borrowing costs. Moody's Analytics economists noted that for the US side, supporting the yen is a relatively low-cost insurance measure that could help reduce the severe pressures facing other Asian currencies.