Citi Downgraded Its Forecast for the Dollar Due to the U.S. Treasury's Debt Buyback Plans

Citigroup's currency strategists have downgraded their short-term outlook for the U.S. dollar and now hold a "bearish" (negative) stance, according to Bloomberg. This is because markets are bracing for a less “hawkish” Fed policy, the midterm elections, and an increase in the volume of government debt buybacks by the U.S. Treasury.

The Citigroup team lowered its three-month forecast for the U.S. Dollar Index (DXY) from 102.12 to 98.34. Analysts have called the U.S. Treasury’s plan to double the volume of bond purchases through November a negative factor for the U.S. currency, Bloomberg notes.

The change in stance came after the bank issued a warning: U.S. Treasury Secretary Scott Bessent’s initiative to lower the cost of long-term borrowing (by increasing the volume of buybacks of 10- and 30-year securities) is likely to take a heavy toll on the dollar. On Thursday, August 20, the dollar index fell to its lowest level since May, after which it remained virtually unchanged, settling at 98.9, according to Bloomberg.

Citigroup noted that in recent months it had taken a “more neutral” stance, although it had warned of a likely increase in risks in the near future. “The most recent development is the U.S. Treasury’s announcement that it will double the volume of bond buybacks through November,” analysts say. “This adds another negative factor for the USD through two channels: it lowers U.S. Treasury yields and raises concerns about financial repression (a policy of managing a country’s financial obligations by intentionally keeping interest rates low. — Oninvest).”

The Ministry of Finance's announcement followed a rise in the cost of government borrowing, which was clearly evident at the August auctions for 10- and 30-year bonds: yields on these bonds reached their highest levels since the 2000s.

In addition, Citigroup strategists raised their three-month forecast for the EUR/USD pair to 1.1750. This is attributed to expectations that the European Central Bank will raise rates by 0.25% in September, as well as to a weakening of market expectations regarding the Fed’s policy tightening.

Citigroup strategists emphasized that traders have tempered their expectations regarding a Fed rate hike, which had previously sparked a wave of optimism about the dollar. Looking ahead, the experts said that markets may avoid long positions in the dollar until the midterm elections in November “due to increased uncertainty surrounding U.S. policy and the risks of potential disputes over the election results.”

At the same time, the team maintained its long-term outlook on the U.S. dollar, continuing to view the growth prospects for the U.S. economy as more attractive compared to those of the G10 countries.

Analysts cited the conflict between the U.S. and Iran, as well as the investment boom in artificial intelligence, as potential risks to the new forecast. In recent months, a reduction in oil shipments through the Strait of Hormuz and major capital expenditures in the AI sector have reignited concerns about inflation, which could prompt the Fed to raise interest rates.

This article was AI-translated and verified by a human editor