EUR/USD targets 1.1800 as Treasury buybacks weaken dollar

The Treasury's move to double long-dated bond buybacks pushed the dollar to an 11-week low Thursday, lifting EUR/USD to a three-month high near 1.1693 and opening the path toward 1.1800. The euro posted a fresh three-month high around 1.1693 during European trading, extending a rally that began after the Treasury Department said it would at least double liquidity-support buyback operations in the 10-to-20-year and 20-to-30-year sectors.

"EUR/USD spiked higher after the US Treasury announced an increase in buyback volumes of longer-dated Treasury bonds, a move that coincided with a flattening of the US yield curve," strategists at Danske Bank said. They noted the 10-year Treasury yield at 4.64 percent is now 10 basis points below Tuesday's peak, and that the adjustment in US yields has "only partly spilled over to Europe, where the primary market has opened with plenty of SSA and covered bond deals."

The dollar index, which tracks the greenback against six major currencies, extended its decline to a fresh 11-week low near 98.70. The Treasury's policy shift, effective Sept. 9 and running to Nov. 4, raises individual buyback operations from a $2 billion maximum to a $4 billion minimum and doubles long-end frequency from two to four per quarter. The 30-year yield had closed at 5.31 percent on Aug. 17, its highest since 2007, before easing to 5.28 percent the next day after the announcement.

The buyback expansion — the program has repurchased $239 billion since its May 2024 relaunch — targets a long end pressured by a $2.1 trillion annual deficit, 3.4 percent US inflation and a surge in AI-driven corporate issuance. With the ECB expected to raise rates in September while the Fed holds steady, the rate differential favors the euro; UOB Group sees room toward 1.1725 with strong support at 1.1600.

Buybacks Concentrate Firepower at the Long End

The Treasury's official rationale: the change "reflects Treasury's desire to provide greater liquidity support in longer-dated nominal sectors where there is consistent strong sponsorship from market participants." The overall quarterly liquidity-support buyback allocation stayed at $38 billion, unchanged, alongside a separate $25 billion for shorter-dated cash-management buybacks — Treasury Secretary Scott Bessent reallocated within the existing envelope rather than expanding it.

The pressure is visible in the Treasury's own par yield curve. On Aug. 17, the 30-year yield closed at 5.31 percent, the 20-year at 5.30 percent and the 10-year at 4.72 percent. The next day the 30-year eased to 5.28 percent, the 20-year to 5.28 percent and the 10-year to 4.71 percent. The drivers stack: investor anxiety over the surging national debt, heavy long-dated supply, CPI running at 3.4 percent year over year, and a surge in corporate issuance tied to AI data-center buildouts competing with Treasuries.

Rate Differential Favors the Euro

Financial markets are confident the European Central Bank will raise rates at its September meeting, while the Federal Reserve is expected to hold steady. The ECB's policy rate stands at 2.40 percent against the Fed's 3.75 percent, with eurozone inflation at 2.9 percent versus 3.4 percent in the US.

On the technical side, EUR/USD trades comfortably above the 20-period exponential moving average at 1.1547, though the Relative Strength Index at 73.98 signals overbought conditions that could cap upside in the very short run. Initial support sits at the 20-day EMA around 1.1547; the pair could advance toward May's high at around 1.1800 once it stabilizes above 1.1700.

UOB Group turned positive on the pair Monday at 1.1570, and after EUR broke above 1.1615 and rallied to 1.1679, now judges "there is room for further upside in EUR toward 1.1725," maintaining a positive view as long as it stays above 1.1600.

The open question is whether concentrated long-end buybacks can durably ease borrowing costs and support bond values, or whether they paper over structural pressures — deficits, sticky inflation and AI-driven corporate issuance — that keep reasserting themselves at the long end. For households, 30-year fixed mortgage rates, which track the 10-year Treasury yield, averaged 6.67 percent on Aug. 13; a sustained decline in long yields would ease mortgage pricing and lift the value of long-duration bond holdings inside retirement accounts.

This article is for informational purposes only and does not constitute investment advice.