Dollar Rebounds from Over Three-Month Low as U.S. Treasury Rally Pauses

The U.S. dollar rose slightly on Thursday, rebounding from a more-than-three-month low, as the rally in U.S. Treasuries began to stall. Rising oil prices also contributed to increased risk-averse sentiment.

In late New York trading, the dollar index (DXY), which tracks the greenback against six major currencies, gained 0.1% to 98.90. The previous session saw the dollar index plunge 0.8%, its worst single-day performance since late July, briefly falling to 98.77—the lowest level since May 14.

Interest rates and fixed-income markets remained central to foreign exchange movements.

On Wednesday, the U.S. Treasury announced it would increase the size of its long-term government debt buybacks from $2 billion to at least $4 billion. This announcement triggered a rally in U.S. Treasuries, pushing yields lower—especially for long-dated bonds. The 30-year Treasury yield fell 9.1 basis points, retreating from near a 20-year high. The 10-year yield declined by 5.3 basis points.

"Traders yesterday interpreted the Treasury's announcement as a 'proactive' signal that the department is willing to use net financing operations more actively to prevent further rises in long-term yields and/or to make room for corporate bond issuance," said Thierry Wizman, Macquarie's foreign exchange and interest rate strategist.

He added, "That perception might explain why the 30-year Treasury yield immediately dropped about 10 basis points after the announcement, even though the Treasury didn't need to conduct a large-scale buyback operation to 'make a big statement.'"

The dollar weakened significantly in response to this move, which Wizman described as "harder to explain."

"On the surface, the U.S. Treasury's 'twist operation' is a cash-neutral maneuver that doesn’t affect the dollar money supply and doesn’t involve the Federal Reserve (Fed). However, we can understand why traders might interpret the possibility of increased short-term bond issuance as a factor that continues to exert political pressure on the Fed to keep policy rates below their otherwise natural level. That’s one reasonable explanation for the dollar’s weakness yesterday," he said.

However, the Treasury rally proved short-lived. On Thursday, traders resumed selling government bonds, pushing the 30-year Treasury yield up 4.3 basis points to 5.237%. A key factor was the U.S. government's total debt surpassing $40 trillion, heightening market concerns about fiscal health.

Scott Bessent, U.S. Treasury Secretary, said in a CNBC interview on Thursday, "The market isn't seeing many underlying factors." He added, "What we're trying to convey is that we believe this is a low-volume area of the market, currently in August, and recently impacted by a large volume of corporate bond issuance."

Bessent said, "We'll always be doing buybacks, and we'll be increasing the scale." He also suggested the buyback size could exceed the announced $4 billion.

Oil Prices Continue to Climb

Oil prices extended their weekly gains on Thursday, rising over 7% cumulatively. Brent crude futures climbed 2.3% to $93.72 per barrel, as there were no signs of resolution in the standoff between the U.S. and Iran over the Strait of Hormuz.

Trump said on Thursday that "nobody" had given Iran a greater chance to reach a deal, but Tehran failed to seize it. The U.S. president pledged to escalate economic pressure on Iran.

Posting on Truth Social, Trump said, "I also declare that any country allowing its financial institutions, companies, airports, or government entities to provide any form of support to Iran will face massive economic consequences. Oil smuggling, swap lines, cash transfers, exchange houses, ship registries, shell companies—all of this must stop now."

He added, "This will be an economic D-Day."

Yen Weakens on Trade Deficit Data

Among other major currencies, the yen weakened, with USD/JPY rising 0.6% to 159.15. Since the historic joint intervention by the U.S. and Japan at the end of July, the yen’s earlier gains have now been erased by about half.

According to data released Thursday by Japan’s Ministry of Finance, rising energy costs drove Japan’s trade deficit in July to 634.58 billion yen ($3.99 billion). Imports surged 27.8% year-on-year, primarily due to higher oil and gas imports.

The euro was flat against the dollar at 1.1674.

Sterling rose 0.2% against the dollar to 1.3627.

As of around 5:40 a.m. Taiwan time Friday (21st), prices:

DXY at 98.8648 (-0.0039%) EUR/USD at 1.1677 (-0.0086%) GBP/USD at 1.3627 (-0.0147%) AUD/USD at 0.7108 (-0.0703%) USD/CAD at 1.3784 (-0.0363%) USD/JPY at 159.0500 (-0.0063%)