US Treasury’s “buy bonds to suppress yields” policy backfires against the dollar? Citi significantly lowers its three-month dollar forecast, says it’s not advisable to go long before the midterm elections

According to Jinse Finance APP, as the market is gradually pricing in expectations of a more dovish Federal Reserve stance, factors related to the midterm elections, and news that the US Treasury may increase the scale of Treasury buybacks, the Citi foreign exchange strategy team has recently turned bearish on the short-term outlook for the US dollar. In a research report on Thursday, Citi strategists led by Daniel Tobon lowered their three-month US Dollar Index forecast from 102.12 to 98.34.

Prior to this downgrade, Citi had warned that the latest move by US Treasury Secretary Scott Besant to reduce long-term borrowing costs—specifically, expanding buyback volumes of 10-year to 30-year bonds—would likely come at the expense of a weaker dollar. On Wednesday, the Dollar Index dropped to its lowest level since May.

Tobon and his team stated that they have been “relatively neutral” on the dollar in recent months but cautioned that risks could intensify in the months ahead.

They wrote in the report: “The key new development is that the US Treasury recently announced it will double the buyback scale before November. This adds fresh downward pressure on the dollar through two channels: first, by lowering US Treasury yields; second, by raising market concerns about financial repression policies.”

Before the Treasury's buyback plan was announced, the latest signs already showed that government borrowing costs have been climbing—the winning yields of the 10-year and 30-year Treasury auctions held in August both reached the highest levels since the 2000s.

The strategists also pointed out that traders have revised down their expectations for Federal Reserve rate hikes, which previously fueled bullish sentiment on the dollar. Looking ahead, they believe the market may avoid long dollar positions ahead of November’s midterm elections, “due to increasing political uncertainty in the US and the non-negligible tail risks related to potential electoral disputes.”

However, the team has not changed its long-term view on the dollar, maintaining that US economic growth prospects remain better than those of other G10 members.

They noted that the US-Iran conflict and the artificial intelligence (AI) investment boom may pose upside risks to their new forecasts. In recent months, reduced oil shipments through the Strait of Hormuz, combined with surging AI-related capital expenditures, have raised inflation concerns, which could prompt the Federal Reserve to resume rate hikes.

In addition, the strategists raised their three-month forecast for the euro against the dollar to 1.1750, mainly based on expectations of a 25 basis point hike by the European Central Bank in September and the market’s lowered expectations for Federal Reserve rate increases.