(Bloomberg) -- The US bond buyback pledge that whipsawed markets this week is prompting comparisons with policies in Japan, where efforts to contain borrowing costs resulted in prolonged currency weakness.
The dollar is trading at a three-month low and is on track for its worst week this month after the Treasury’s surprise midweek announcement that it would double the amount of longer-dated bonds it can repurchase ahead of schedule.
The US government’s move is the “clearest sign yet” that the US is following Japan toward debasing its currency, said Robin Brooks, a senior fellow at the Brookings Institution. The administration is “playing with fire,” he said.
After initially jumping on the news, Treasuries have unwound their advance. Gold and other precious metals are rallying.
According to Steven Barrow, Standard Bank’s head of G10 strategy, containing bond yields with buybacks will only pile pressure on the greenback, while failing to tackle the underlying budget deficit that’s pushing them higher.
Dollar Seen Paying the Price for Treasury Bid to Tame Yields
To be sure, the Bloomberg dollar index is only down 1% this year and the Japan comparison has its limits. So-called Abenomics — the economic policy pursued by former Japanese Prime Minister Shinzo Abe — relied on aggressive monetary policy loosening to spur growth.
That included a massive quantitative easing program that effectively printed yen to buy bonds and keep yields low — forcefully weakening the Japanese currency.
The Treasury buybacks can’t be compared to that kind of monetary stimulus, and the US hasn’t chosen to accept a falling currency as the cost of keeping yields pinned.
According to Barrow, the proof of that was in Washington’s intervention to support the yen last month. By using euros, rather than dollars, the greenback was protected. Meanwhile, US yields were shielded because Japan didn’t have to sell Treasuries to get the dollars needed to buoy the yen.
“The problem is that the US can’t have its cake and eat it,” Barrow said.
Jackson Hole
Currency traders are awaiting Federal Reserve Chairman Kevin Warsh’s speech at the Jackson Hole symposium at the end of the month.
Hawkish comments that push back against expectations for lower interest rates, could give the dollar a reprieve.
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“Any indication of how he views persistent inflation, the recent rise in long-term yields or the future size and role of the Fed’s balance sheet could trigger a meaningful repricing across Treasuries, the dollar, gold and equities,” wrote Daniela Hathorn, a senior market analyst at Capital.com.
But if the Fed resists pressure for higher rates, the debasement narrative could gain traction. Options sentiment is the most bearish on the dollar since February, even as spot prices retreat, suggesting that traders are positioning for more losses ahead.
“It can be next to impossible to stabilize a currency once it enters a devaluation spiral,” Brooks at the Brookings Institution said.
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