Sterling today: Pound rises as dollar slides on Treasury buyback signal
The British pound and euro strengthened against the U.S. dollar after an unscheduled U.S. Treasury intervention to cap long-end bond yields triggered a broad dollar selloff and boosted global risk appetite.
Intelligence analysis by Gemini 2.5 Flash
The U.S. Treasury's surprise announcement of increased liquidity buyback operations, totaling $2 billion, signaled discomfort with recent bond market selloffs, leading to a drop in longer-dated U.S. yields. This move weakened the dollar and fostered a 'risk-on' environment, allowing currencies like the pound and euro to gain, despite a lack of specific positive news from the UK or Eur…
Imagine the U.S. government saw that a special kind of money-lending market was getting a bit wobbly, like a tower of blocks about to fall. So, they quickly stepped in to steady it by buying some of those blocks back. This made their own money, the U.S. dollar, a little less strong, which in turn made other countries' money, like the British Pound and the Euro, look a bit stronger and more attractive, like when the biggest kid on the playground takes a break and others get to shine.
Analysis
U.S. Treasury
The primary catalyst for the dollar's decline and the subsequent rise in the pound and euro was an unscheduled intervention by the U.S. Treasury. On Wednesday, the Treasury announced an increase in its liquidity buyback operations by $2 billion, a move interpreted by analysts as a signal of official displeasure with the recent selloff at the long end of the bond market. This intervention directly led to a fall of approximately 10 basis points in longer-dated U.S. yields, alleviating pressure on the bond market.
The Treasury's action, dubbed the "Bessent Put" by some, effectively reduced one of the key threats to risk assets during the current period. By stepping in to manage bond yields, the Treasury aimed to stabilize market conditions and prevent further volatility. This proactive measure was crucial in shifting market sentiment, moving from a cautious stance to one that favored risk-taking, which in turn had a ripple effect across global currency markets.
Chris Turner
Chris Turner, Global Head of Markets at ING, provided key insights into the market's reaction, noting that the unscheduled announcement clearly indicated the Treasury's discomfort with the bond market's long-end sell-off. He highlighted that this intervention, which he referred to as the "Bessent Put," mitigated a significant risk to assets, suggesting that carry trade strategies would likely remain popular. Turner's analysis underscored the unexpected break of the DXY (Dollar Index) from its established 99.40-100 range, predicting a potential drift towards 98.65, with 98 as the next support level if risk assets continued their upward trajectory.
Turner's commentary also touched upon the euro's performance, noting that EUR/USD broke higher following the Treasury announcement and was trading around ING's end-September target of 1.17. He identified 1.1700 as a potential short-term resistance point, with 1.1790 beckoning if that level is breached, and support seen at 1.1650/60. His projections emphasize the significant impact of U.S. policy on global currency pairs, even in the absence of specific European economic news.
EUR/USD 1.17
The euro's ascent to trade around ING's end-September target of 1.17 was a direct consequence of the U.S. Treasury's intervention and the resulting dollar weakness. This move was further underpinned by robust ECB data, which revealed that foreigners had purchased approximately €1.1 trillion in eurozone securities over the past 12 months. June alone recorded the largest ever monthly debt purchases at €200 billion, reinforcing a narrative of diversification away from U.S. assets.
This strong foreign interest in eurozone securities provides a medium-term bid for the euro, suggesting sustained demand for the currency. While resistance at 1.1700 might prove challenging in the short term, the underlying fundamentals, coupled with the dollar's current trajectory, point towards potential further gains for EUR/USD. ING's end-September targets for EUR/USD at 1.17 and DXY near 98 indicate a continued expectation of dollar weakness and euro strength, unless materially hawkish Fed guidance or a failure of the Treasury's buyback signal to anchor long-end yields emerges.
Key points
- Sterling and the euro rose against the U.S. dollar on Thursday.
- The primary driver was an unscheduled U.S. Treasury intervention to increase liquidity buyback operations by $2 billion.
- This action aimed to cap long-end bond yields, leading to a broad dollar selloff and increased global risk appetite.
- Longer-dated U.S. yields fell approximately 10 basis points in response to the Treasury's announcement.
- The pound's gains were attributed entirely to the dollar-side dynamic, not UK domestic fundamentals.
The U.S. Treasury's intervention could successfully stabilize long-end bond yields, reducing a significant threat to global risk assets and potentially sustaining popular carry trade strategies. This could lead to continued strength in currencies like the pound and euro, fostering a more stable and risk-on global market environment.
The dollar's newly established lower range could face challenges if Federal Reserve policymakers, such as Mary Daly, adopt a more hawkish tone in their upcoming speeches, or if the Treasury's buyback signal proves insufficient in anchoring long-end yields, potentially reversing recent currency gains.