Rabobank brings forward 1.18 euro target as dollar slides

Rabobank brought forward its euro target to 1.18 against the dollar as US debt-market concerns eroded confidence in the greenback, with EUR/USD ending the week near 1.1677 after touching 1.1711 mid-week.

"Treasury buyback programmes lose their capacity to suppress long-end yields once investor anxiety about sovereign financing capacity becomes the primary force shaping demand for government debt," said Vitali Meschoulam, strategist at Goldman Sachs.

The dollar index slid 0.9 percent to a three-month low of 98.76, while the 30-year Treasury yield rose 1.4 basis points to 5.2508 percent. Gold gained 3.6 percent to $4,537.41 an ounce, and silver advanced 1.3 percent to $68.93. US sovereign debt now exceeds $40 trillion, with the fiscal deficit approaching $2 trillion.

The divergence between the Treasury's debt-management operations and the Federal Reserve's tightening stance is undermining confidence in the dollar. Futures markets assign a 63 percent probability the Fed holds rates at its September meeting, with 37 percent pricing a 25-basis-point hike.

The Treasury's decision to double long-dated bond buyback operations to at least $4 billion per operation injected fresh liquidity into the financial system, effectively expanding the dollar money supply. Treasury Secretary Scott Bessent has indicated further expansion remains possible, while Fed Chair Kevin Warsh insists on reducing the central bank's balance sheet. The contradiction between the two policy paths is weighing on the currency.

The last time fiscal and monetary policy diverged this sharply was in 2022, when the UK's Liz Truss government clashed with the Bank of England, sending the pound to historic lows. Japan's experience under Sanae Takaichi, when fiscal stimulus collided with BoJ tightening, pushed the yen to 40-year lows. The dollar's slide against what should be a favorable backdrop — stabilizing yields and rising oil prices — suggests markets are pricing a similar dynamic.

Why yields rise even as the Treasury buys back debt

The 30-year yield rose 1.4 basis points to 5.2508 percent despite the buyback expansion, showing that fiscal sustainability concerns outweigh the technical supply-reduction effect. At $40 trillion in sovereign debt, each incremental yield rise is a double-edged signal that simultaneously attracts yield seekers and repels dollar bulls. International investors are pricing both sides of that equation, limiting the dollar's ability to benefit from higher yields in the conventional manner.

The buyback programme's failure to contain long-end yields mirrors the pattern seen in Japan, where government attempts to control bond yields ultimately resulted in significant yen weakness. Bessent has argued that concerns about the budget deficit are exaggerated, noting that import duty revenue in 2026 is expected to be roughly the same as in 2025. The Treasury maintains it has a range of tools to bring down yields in the debt market.

What the September Fed decision means for the dollar

Two Federal Reserve officials have raised concerns that Treasury debt-management changes could influence long-term yields and complicate the policy calculus. A September hold would preserve the current rate environment and allow dollar weakness to remain the dominant pricing force. A 25-basis-point hike would strengthen the dollar, raise the yield benchmark, and increase the opportunity cost of non-yielding assets — a scenario markets currently price at 37 percent.

For currency markets, the euro's path toward 1.18 hinges on whether the Fed validates the market's dovish pricing in September. If the dollar's slide continues, the euro could extend gains beyond Rabobank's target, with implications for European exporters and US multinational earnings. August inflation data, due before the September meeting, will shape the policy path. A sustained move in the dollar index below 98 would accelerate the currency's decline and likely push the euro through the 1.18 level sooner than Rabobank's revised timeline.

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