EUR/USD: the dollar weakens

The euro surged sharply against the dollar yesterday, climbing nearly 1% during the session to return to around $1.167 - its highest level since May. This movement originated primarily in the US: US Treasury intervention in the bond market triggered an easing of yields and, consequently, a drop in the greenback.

The US Treasury announced it would double its buyback operations for bonds with maturities ranging from 10 to 30 years. Starting 9 September, the volume of these operations will reach at least $4 billion each, up from a previous maximum of $2 billion. The goal is clear: to improve market liquidity and curb the surge in long-term borrowing costs.

This intervention comes at a particularly tense time. On Tuesday, the yield on the 30-year Treasury bond had hit 5.336%, its highest level in 19 years. Following the announcement, the yield fell by as much as ten basis points, while the 10-year yield retreated to around 4.64%. This easing directly weighed on the dollar; when US yields fall, the yield advantage offered by dollar-denominated assets shrinks, tending to make the US currency less attractive.

The issue is all the more sensitive given the continued deterioration of US public finances. Total US debt has just crossed the $40 trillion threshold for the first time, reaching $40.046 trillion. It has more than doubled in less than a decade. Interest payments alone now amount to approximately $1.1 trillion annually.

This fiscal trajectory helps explain the recent pressure on long-term rates. Investors are demanding higher returns to absorb massive volumes of debt, even as inflationary risks remain high. The doubling of Treasury buybacks appears to be a direct response to tensions observed in the bond market. In the short term, this strategy eases yields but simultaneously removes significant support for the dollar.

The greenback had already begun to lose ground prior to this announcement. The slowdown in US inflation in July and several weaker economic data points had dampened expectations of another Federal Reserve rate hike. The Treasury's intervention amplified this dynamic by easing financial conditions at the long end of the yield curve.

However, the minutes from the Fed's latest meeting, released Wednesday evening, show that the debate over monetary policy is far from settled. During the July meeting, central bank officials expressed growing concerns regarding price trends, and several members indicated a willingness to raise rates.

The Fed faces a particularly complex situation. On one hand, recent US data have reduced the need for further monetary tightening. On the other, the war in the Middle East continues to exert significant upward pressure on energy prices. Brent crude remains above $90 per barrel, while oil shipping through the Strait of Hormuz remains heavily disrupted. A sustained rise in energy prices could reignite inflation and force the Fed to maintain a restrictive policy for longer.

The European bond market also reflects this issue. Expectations for ECB rate hikes remain near their highest levels since the conflict in the Middle East began. Money markets have now fully priced in a deposit rate of 2.75% by next March, up from the current 2.25%. This shift indirectly supports the euro by narrowing the monetary policy gap with the United States.

Nevertheless, European yields remain under less pressure than their US counterparts. Debt stands at approximately 88% of GDP in the eurozone, compared to around 120% in the United States. On Thursday morning, the 10-year German Bund was trading around 3.25%, while the two-year German yield - highly sensitive to monetary policy expectations - hovered around 2.85%.