It appears the US-coordinated currency intervention may have preceded a broader effort to push Treasury yields lower. The Treasury Department has demonstrated that it is prepared to intervene in the government bond market. How could this affect the US dollar? Let’s examine the implications and develop a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- The Treasury will not tolerate a sustained rise in Treasury yields.
- The US dollar risks following the yen’s path.
- Speculators are likely to test the Treasury Department’s resolve.
- Short trades on the EUR/USD can be considered at 1.17 and 1.173.
Weekly Fundamental Forecast for Dollar
Whereas markets once stopped panicking when the Fed stepped in, the Treasury has now taken on a similar role. During the global financial crisis, the Fed launched quantitative easing, while during the pandemic, it slashed interest rates. Both measures helped calm nervous investors. Now, by announcing plans to increase its purchases of long-term Treasuries from $2 billion to $4 billion, the Treasury Department has signaled its intention to push yields lower. However, the underlying problem may run much deeper.
The current US administration is acting less like traditional politicians and more like businesspeople—which, in many respects, is exactly what they are. Donald Trump is demanding stakes in American companies and imposing tariffs to boost government revenue. Meanwhile, former hedge fund manager Scott Bessent has been involved in two notable initiatives in recent weeks: a coordinated currency intervention with Japan and the announcement of what was described as an operation to increase Treasury buybacks.
US Treasury Yield
Source: Bloomberg.
In fact, the goal was achieved: yields on 30-year Treasuries fell sharply from their 2007 peak levels. However, a closer look suggests that the Treasury lacks the firepower to reverse the broader uptrend in yields. The Treasury market is estimated at around $31 trillion, making $2–4 billion a drop in the bucket. In July alone, the federal budget deficit reached $432 billion. To keep the deficit at its current level, the Treasury would need to increase its issuance of short-term debt as long-term bond redemptions rise. Since market interest rates are interconnected, yields are likely to face upward pressure over time.
Moreover, three main factors are driving the rise in Treasury yields: the budget deficit, competition for capital from AI-related investment, and geopolitical risks. Scott Bessent can influence only the first of these to any significant extent. With US gross debt exceeding $40 trillion and the IMF projecting the US fiscal deficit-to-GDP ratio to reach 7.5% in 2026, the Treasury Secretary’s room for maneuver is limited.
US Fiscal Deficit-to-GDP Ratio
Source: Wall Street Journal.
Citigroup and Deutsche Bank believe the Treasury’s statement was, in fact, aimed at weakening the US dollar. The US Dollar Index did plunge, despite Donald Trump’s threats against Iran and the hawkish tone of the FOMC meeting minutes. As a result, the greenback may follow the yen’s path.
The Treasury has shown that a 5.3% yield on 30-year Treasuries is a pain threshold. Investors should therefore be prepared for the possibility that, if yields approach or exceed this level, the Treasury may take further measures to curb rising borrowing costs.
Weekly Trading Plan for EUR/USD
If the currency interventions were indeed a trial run, it would be prudent to lock in some profits on long positions opened at 1.16, or even consider selling the EUR/USD at current levels or at 1.17 and 1.173. Treasury market speculators are likely to test the Treasury’s resolve, much as yen sellers are testing the Japanese government’s decisiveness.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
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