Besenet has depressed U.S. Treasury yields, making the dollar the biggest "victim"! Alternative safe-haven currencies and emerging market currencies have surged in response.

When the yield on the U.S. 30-year Treasury bond surged to 5.337% earlier this week, marking the highest level since 2007, the pricing anchor for global assets is undergoing one of the most severe revaluations in decades. As the market frets over uncontrollable long-term borrowing costs, U.S. Treasury Secretary Scott Bettcher dropped a bombshellraising the liquidity support repurchase operation size for 10- to 30-year Treasury bonds from the previous $2 billion to at least $4 billion per operation. This action immediately suppressed long-end yields: within hours of the announcement, the yield on the 30-year U.S. Treasury bond plummeted nearly 10 basis points to 5.18%. However, Bettchers market rescue triggered a chain reaction in the global foreign exchange marketthe Bloomberg Dollar Index fell to a three-month low, with the Japanese yen, Swiss franc, and New Zealand dollar emerging as the biggest winners. A comment from Deutsche Bank's chief fixed-income strategist in Japan, Akira Ohmori, struck at the heart of market interpretations: The Treasury can buy back its own bonds, but it cannot buy back the dollar. From predictably routine to most interventionist: a 180-degree shift in policy philosophy On Wednesday, the U.S. Treasury announced it would raise the liquidity support repurchase operation cap for nominal coupon Treasury bonds from the previous $2 billion to at least $4 billion for 10- to 20-year and 20- to 30-year maturities. The new rules will take effect on September 9 and last until November 4, coinciding with the current refinancing quarter. The timing of this decision itself sends a strong signal. Just two weeks prior, the Treasury had released its quarterly refinancing report. John Briggs, head of U.S. interest rate strategy at Natixis, pointed out that if this plan had been disclosed in a routine announcement, the market reaction would not have been as intense; but now, the timing shows that officials were not pleased with what was happening at that time. Ohmori dubbed Bettcher as the most interventionist Treasury Secretary in decades, noting that this move marks a clear departure from the Treasury's long-standing principle of predictably routine debt management. Ironically, Bettcher had criticized former Treasury Secretary Janet Yellen for employing a similar strategy of increasing short-term Treasury issuance to reduce long-term financing costs in 2024, believing it amounted to artificially influencing the market. Now he finds himself on the same path. Citi Group candidly stated, In our view, this move is aimed at controlling long-end yields, not for the purpose of maintaining normal market operations. Wall Street gasped, effectively branding this as a de facto Operation Twista classic tool used post-financial crisis by the Federal Reserve to lower long-term interest rates by buying and selling Treasuries of different maturities. The sacrifice of the dollar: the cost of suppressing yields is paid in greenbacks Bettchers repurchase operations are pushing the dollar into a precarious position. Mohit Kumar, chief economist at Jefferies International Europe, opined, Any form of yield control weakens the dollar. Gerald Gan, chief investment officer of Singapore family office Reed Capital, stated bluntly, The dollar is undoubtedly the biggest victim. He argued that Bettcher is deliberately suppressing long-term real interest rates and signaling a tolerance for a weaker dollar to keep the economy running. Gan mentioned plans to further diversify investments and reduce dependence on the dollar. Andrew Canobi, head of fixed income at Franklin Templeton in Melbourne, pierced through this veneer: Bettcher is essentially saying we are prepared to sacrifice a bit of dollar strength for a degree of control over term yields. He added, There has to be a pressure release valve. The Bloomberg Dollar Index fell about 0.8% on Wednesday and continued to hover at a three-month low on Thursday. The dollar index DXY dipped as low as 98.708. Options market data indicated that traders first reaction was to increase dollar short positions, with demand for the euro and pound being the strongest. Chris Turner, strategist at ING, remarked that the Treasurys decision to increase the scale of long-term Treasury repurchases reduced one of the major threats risk assets faced this summer, but placed pressure on the dollar. Evercore ISI strategists noted, Bettcher would welcome these currency fluctuations, as the Trump administration has long advocated the benefits of a weaker dollarbelieving this would help improve U.S. competitiveness and reduce the trade deficit. The policy puzzle is coming together: from intervening in the yen to suppressing long-term bonds Recent policy maneuvers from Washington are reshaping market confidence in the dollar's long-term viability. Just weeks ago, the U.S. collaborated with Japan for the first joint intervention in the yen since 1998. Bettcher also hinted that tools from the Fed may be utilized for financing subsequent interventions if necessary. With the introduction of long-bond repurchase yield control, a broader policy picture is emerging: Washington appears increasingly willing to trade market intervention for manageable borrowing costs. Traders are likely to view this as an attempt to suppress market pricing of the sustainability of U.S. finances and the Fed's anti-inflation credibility. Masahiko Loo, senior fixed-income strategist at State Street Global Advisors, noted that although the dollar is supported in the short term by AI-driven inflows into U.S. stocks and rising oil prices, the latest measures reinforce the narrative of long-term de-dollarization and currency depreciation. As sovereign AI plans and data center construction spread outside the U.S., the special capital influx advantage currently enjoyed by the U.S. may gradually erode. Overseas demand for U.S. Treasuries is also simultaneously cooling. Data released on Monday by the U.S. Treasury showed that as of June, overseas investors held a total of $9.299 trillion in Treasuries. Japan, as the largest foreign debtor of the U.S., reduced its holdings to $1.116 trillion in June, a decline of $26.4 billion within the month. Deutsche Bank strategist George Saravelos remarked that this is gentle financial repression. Loo noted that the new measures reinforce the narrative of long-term de-dollarization and currency depreciation, as sovereign AI plans and data center construction extend beyond the U.S., possibly eroding the special capital inflow advantages currently enjoyed by the U.S. The structural limitations of repurchases: a temporary painkiller or a Pandora's box? Despite Bettchers intervention stabilizing the bond market in the short term, Wall Street remains generally skeptical about its long-term effectiveness. Brian Jacobsen, chief economic strategist at Annex Wealth Management, characterized this move as a temporary painkiller, further emphasizing, We are in an era dominated by fiscal intervention and modern monetization. He cautioned, The Fed is powerless in influencing long-term rates. Now the Treasury will issue more short-term debt due to weak demand for long-term debt. Even if the Fed raises rates, the Treasury is effectively injecting more short-term debt resembling currency into the economy. Jack McIntyre, a portfolio manager at Brandywine Global Investment, was even more direct: What truly lowers long-term rates is an economic slowdown or a resolution of conflicts in Iran; Im not sure weve reached that point. The fundamental factors pushing up U.S. Treasury yields remain unchanged: the projected U.S. fiscal deficit of $1.9 trillion, persistent inflation above the Fed's 2% target, and a torrent of corporate debt due to AI competing with government bonds for investor attention. Saravelos labeled this as a form of gentle financial repression. Bettchers bearish options enhance the attractiveness of arbitrage trading, creating an opportunity window for alternative assets: the yen, gold, and the Swiss franc, along with emerging market currencies strengthening Amid the dollar's pressure triggered by Bettchers actions, alternative assets are seizing new opportunities. Ohmori predicts that the yen will be the biggest beneficiary over the next three to six months. Recent measures from Washington are eliminating two key factors that previously led to yen weakness: one being Japans need to sell U.S. Treasuries to finance intervention measures, and the other the pressure from rising U.S. long-term yields. He is also positive on gold, followed by the Swiss franc and euro as alternatives to the dollar. Market data confirm this trend. On Wednesday, the yen, Swiss franc, and New Zealand dollar emerged as the biggest winners against the U.S. dollar. Gold also received an immediate boost following the announcement of the repurchase operations. Analysts point out that traders are likely to view this as an attempt to suppress market pricing of U.S. fiscal sustainability and the Feds anti-inflation credibility, providing structural support for alternative assets. MSCI Emerging Markets Currency Index reaches historic high At the same time, emerging market currencies have reached new highs, as a weaker dollar enhances the appeal of popular trades, offsetting the impact of a new round of rising oil prices. The U.S. Treasurys announcement to increase government bond repurchases has weakened the dollar, consequently boosting so-called arbitrage trades. This has made the dollar a cheaper funding currency for investments in high-yield emerging market currencies. Bettchers bearish optionsor the idea that someone is supervising the U.S. Treasury markethave reduced one of the major threats risk assets faced this summer, which should keep arbitrage trading strategies popular, remarked Chris Turner, global markets head at ING. The MSCI Emerging Markets Currency Index rose 0.2%, marking its second consecutive trading day of gains. The Thai baht led the way, up 0.6% to a two-month high; the Philippine peso also rebounded from historical lows. The Czech koruna was the outperforming currency in the EMEA region. In other foreign exchange markets, the Indonesian rupiah hit a two-month high against the dollar. Deutsche Bank noted that FTSE Russell decided to delay adjustments to its stock indices this week, alleviating a potential equity market-related downside risk for the rupiah. The Jakarta Composite Index was among the best-performing stock indices globally on Thursday. Deutsche Bank economists Henry Hao and Moses Lim stated in a report that, The FTSE index may still reduce the weight of limited free float stocks in September, but this decision has temporarily delayed the risk of these stocks being downgraded to frontier market status. The South Korean won, after hitting an 11-month high in the previous trading session, underperformed other major currencies this week. Meanwhile, the South Korean stock market rose for the first time this week, with the KOSPI index marking its largest single-day gain of the month. Samsung Electronics and SK Hynix were key drivers behind the 2% increase in the MSCI Emerging Markets Equity Index, primarily attributed to market expectations that shareholder returns would reach record highs. Shares of Taiwan Semiconductor Manufacturing Company also rose, as it is another heavyweight in the index and a beneficiary of the AI boom.