The U.S. Treasury steps in to ease pressure from long-term bond sell-offs, with the dollar experiencing its largest drop in three weeks, reaching a low not seen in over three months.

The U.S. dollar weakened significantly on Wednesday after the U.S. Treasury unexpectedly announced an increase in the size of long-term U.S. Treasury bond repurchases, leading to a rebound in the Treasury market and a notable decline in long-term yields. The Bloomberg Dollar Spot Index fell as much as 0.7% during the session, marking the largest drop in three weeks and reaching its lowest level since mid-May. On the same day, the dollar declined against all major currencies, with the Swiss franc and Swedish krona leading the gains, while the Japanese yen also strengthened considerably. Market participants believe that the Treasury's sudden move to increase long-term bond repurchases has alleviated the recent sell-off pressure in the long end of the U.S. Treasury market, while also signaling to investors that the Treasury is closely monitoring fluctuations in the bond market. Recently, long-term U.S. Treasuries had been under consistent selling pressure, with the yield on 30-year bonds reaching its highest level since 2007 at one point. Concerns in the market include the rapid expansion of U.S. federal debt, energy and inflation risks stemming from the war in Iran, a surge in corporate bond issuance driven by the AI investment craze, and U.S. inflation remaining above the Federal Reserve's 2% target since 2021. After the Treasury's announcement to increase the long-term bond repurchase program, the long end of U.S. Treasuries rebounded quickly, with the 30-year yield dropping by about 8 basis points at one point. The decline in Treasury yields further weakened the dollar's interest rate advantage, becoming a significant driver of the dollar's drop that day. At the same time, expectations for further interest rate hikes by the Federal Reserve in the near term have cooled. Investors generally anticipate that the Fed is unlikely to raise rates again before at least December. The market is awaiting the release of the latest Fed meeting minutes later on Wednesday, to determine whether voices supporting further tightening of monetary policy have strengthened and how policymakers are assessing current inflation risks. Jane Foley, head of foreign exchange strategy at Rabobank, noted that the stabilization in the U.S. Treasury market on that day created conditions for the dollar's decline. She pointed out that while inflation and bond supply risks still exist, the increasing proportion of U.S. Treasuries held by hedge funds could also make the bond market more sensitive to volatility. It is worth noting that the dollar's reaction to the Treasury's repurchase news was quite pronounced. Despite minimal changes in short-term interest rates, the dollar fell rapidly, indicating that investors may interpret the Treasury's actions as attempts to alleviate pressure in the long end of the Treasury market. Bloomberg macro strategist Brendan Fagan noted that although the Trump administration has consistently claimed to support a "strong dollar" policy, a series of recent actionsincluding the U.S.-Japan coordinated intervention in the foreign exchange market and Treasury Secretary Yellen's statements regarding some currencies being undervaluedhave complicated market judgments about the actual exchange rate policies of the U.S. government. The weakening dollar also propelled a notable rebound in the yen. The dollar fell by about 0.9% against the yen, with the yen rising to 158.17 per dollar, its strongest level in over a week. Prior to this, the yen had appreciated significantly following the joint U.S.-Japan market intervention earlier this month but had subsequently retraced those gains, remaining down about 0.7% against the dollar since August. Howard Du, a strategist at TD Securities, stated that the widespread decline in the dollar that day was primarily driven by news from the U.S. Treasury, and that this action signals that the Treasury is closely monitoring the ongoing sell-off in long-term U.S. Treasuries this week. Overall, the unexpected expansion of the Treasury's long-term bond repurchase program has temporarily alleviated pressure in the bond market but has also created new downward pressure on the dollar by lowering long-term yields. Against the backdrop of cooling expectations for short-term rate hikes by the Fed, the movements in the bond market and the forthcoming Fed meeting minutes will become critical factors influencing the dollar's next moves.