To The Moon

U.S. Treasury supports the yen and caps U.S. Treasury yields, pushing the dollar to a seven-month low! Can CPI reverse short-selling trades?

As the yen strengthens, the U.S. dollar is approaching its lowest level in nearly seven months, with traders closely monitoring the U.S. Treasury’s buyback program announcement and inflation data later this week. U.S. Treasury Secretary Scott Bessent has challenged traders to test his resolve in supporting the yen.

Zhitong Finance APP reports that as the yen exchange rate rebounds sharply, the U.S. Dollar Index is approaching its lowest level in nearly seven months. Traders are anxiously awaiting the U.S. Treasury's announcement on bond buybacks and the official U.S. CPI data later this week.

The Bloomberg Dollar Spot Index, one of the benchmark indices measuring the strength of the U.S. dollar, fell by 0.2% at one point on Wednesday, nearing its lowest level since February 18. The recent decline in the dollar has been primarily driven by the rise in the yen, which is the second-largest sovereign currency component in the index by weight. The yen appreciated 0.5% against the dollar, expanding its cumulative gain for the month to approximately 4%.

The direct drivers of this wave of 'weak dollar' trades are the strengthening yen, shifting expectations for relative interest rates, and policy interventions, which collectively compress the profit margins for dollar longs. Notably, the current decline in the dollar primarily reflects the repricing of cross-currency positions and interest rate differentials; it should not be directly interpreted as a comprehensive withdrawal of global reserve funds from the U.S. dollar.

The yen has appreciated by approximately 4% this month. U.S. Treasury Secretary Scott Bessent has increased the policy risk of shorting the yen with his tough stance, stating, 'I am the forex market maker.' Expectations of a rate hike by the Bank of Japan provide interest rate support for the yen: the yield on Japanese 10-year government bonds has reached 3%. Fitch Ratings believes that rising domestic yields may attract Japanese institutions to keep more funds domestically. Consequently, the attractiveness of carry trades dominated by yen funding is declining, and the unwinding process may generate demand for buying back yen-denominated assets and reducing exposure to overseas assets.

U.S. Dollar Approaches Seven-Month Low as Treasury Buybacks and Inflation Data Take Center Stage

U.S. Treasury Secretary Scott Bessent challenged traders to test his resolve in pushing for a stronger yen, stating that his current market judgments are effectively based on insider information, placing further pressure on the dollar. These remarks represent some of Bessent's toughest statements to date, as he engages in an unusual campaign to steer the market according to his preferences.

As shown in the chart above, Bessent challenged traders betting on a decline in the yen, declaring, 'I am the market maker.' The U.S. Dollar Index is expected to record its lowest closing level since February this year.

Bessent is also poised to reveal the extent of action he is willing to take initially to curb the rise in U.S. Treasury yields through an expanded bond buyback program. The U.S. Treasury is expected to announce the size of the next day's repurchase operations later on Wednesday, targeting outstanding U.S. Treasury securities with maturities of 10 to 20 years.

'To impact the market, the size of Bessent's initial operation needs to exceed $4 billion; even if the initial scale is much larger, reaching $8 billion to $10 billion, we would not be surprised,' said Mohit Kumar, Chief Economist and Strategist for Europe at Jefferies International.

However, JPMorgan's market research team believes that the U.S. Treasury is unlikely to provide further information regarding the specific size of its repurchase operations.

Traders are also monitoring the U.S. inflation data released on Friday, which may help shape market expectations for the Federal Reserve’s policy decision next week. Money markets currently assign approximately a 60% probability to a 25-basis-point rate hike by the Fed.

Options indicators suggest that traders remain broadly bearish on the U.S. dollar in the short term. Nevertheless, they see upside potential for the dollar against the euro and the pound sterling, as elevated energy prices pose particularly significant downward pressure on these two currencies. Amid mutual attacks between the United States and Iran, Brent crude rose to $100 per barrel on Wednesday.

Yen Rebounds, Treasury Repo Exerts Pressure: Can CPI Help the Dollar Stage a Comeback?

In addition to the yen’s strength and shifting expectations for relative interest rates, U.S. Treasury repurchase agreements (repos) represent another policy variable facing the dollar. The key question is whether the actual scale will exceed what the market has already priced in.

The U.S. Treasury previously announced that it would increase the single-operation liquidity support repo size for the 10–20-year and 20–30-year maturity segments from a maximum of $2 billion to at least $4 billion, effective from September 9. Jefferies believes that the initial operations would need to exceed $4 billion to have a market impact, potentially reaching $8–10 billion.

If repos effectively suppress long-end U.S. Treasury yields and narrow their yield advantage over overseas bonds, the dollar will face further pressure. However, repos themselves do not improve the fiscal deficit; their sustained impact depends on Treasury supply and inflation trends. The focus of dollar trading lies in the yield changes triggered by repos and their policy signals, rather than simply interpreting the repo amount as an equivalent volume of dollar selling.

Conflict in the Middle East has led to notable divergence in the dollar’s performance across currency pairs. U.S. strikes on Iranian oil tankers, Iranian retaliatory measures, and Houthi attacks on Saudi energy facilities pushed Brent crude to $100.07 per barrel on September 9. High oil prices exacerbate trade bills for energy-importing economies and squeeze real incomes, placing both growth and inflation under pressure for the euro and the pound sterling. Japan also faces rising energy import costs, but expectations of rate hikes and intervention risks currently provide more direct support for the yen. Consequently, a decline in the U.S. Dollar Index can coincide with support for the dollar against the euro and the pound sterling, meaning strategies betting on broad-based dollar weakness may not adequately capture this divergence.

The U.S. CPI release on September 11 is a critical test of whether the U.S. Dollar Index can regain support from Federal Reserve interest rate expectations. The U.S. Bureau of Labor Statistics confirmed that the August CPI figures will be released at 8:30 a.m. Eastern Time on that day. Money markets have currently priced in approximately a 60% probability of a 25-basis-point rate hike by the Fed next week. If core inflation and service prices significantly exceed expectations, market bets on a rate hike could intensify further, supporting a dollar rebound by pushing up short-end U.S. yields. Conversely, if inflation cools markedly, leading to a retreat in rate hike expectations and downward pressure on short-term Treasury yields, this could compound pressure on the dollar alongside expectations of a stronger yen and lower long-end yields due to repo operations.