"Dollar debasement" talk returns
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The Treasury Department's unusual bond market intervention Wednesday is prompting questions about its commitment to a longstanding cornerstone of American economic statecraft: the strong dollar policy.
Why it matters: The "strong dollar policy" is shorthand for the U.S. government's commitment to policies guided by economic orthodoxy — concern over debt and deficits, non-intervention in markets and central bank independence, among them — that have for the most part characterized both parties' management of the economy for decades.
Yes, but: As the department's move in the U.S. Treasury market Wednesday showed, the current administration appears willing to jettison such niceties to achieve its goals.
- Other examples include purchasing stakes in multiple private companies, providing U.S. dollar swap lines to Argentina, intervening in currency markets and putting pressure on the Federal Reserve to lower interest rates — as recently as this week.
The latest: Treasury Secretary Scott Bessent appeared on CNBC Thursday morning emphasizing that the Treasury could buy back more than the $4 billion in long-term U.S. government bonds, the headline number it cited Wednesday in announcing plans to double the size of the auctions it uses to repurchase bonds from market participants.
How it works: The stated justification for the buyback program is to remove illiquid long-end bonds from the market in order to improve trading conditions.
Context: The program also effectively reduces supply of long-term government debt. All else being equal, lower supply in the face of steady demand raises the price of those bonds.
- Because bond prices and yields move in opposite directions, that reduces the yields on those Treasury bonds, which serve as key foundations for borrowing costs throughout the economy.
What they're saying: Wall Street thinks lower rates were clearly the goal of the Treasury move.
- "We see a through-line here across a number of policy actions from Treasury in recent weeks, and believe Treasury is uncomfortable with the rise in long-term yields, as it runs against the Secretary's stated goal," JPMorgan bond market analysts wrote.
- "In our view, Treasury increased these operations to limit the long-end selloff. This was not done for market functioning purposes," Citigroup bond market analysts added.
Between the lines: The consensus takeaway on Wall Street seems to be that the "debasement trade" — a bet on a weakening U.S. dollar — is back on, with several analysts advocating boosting bets against the greenback and on hard assets like gold.
- "Expressions of debasement fears are a weaker USD and long gold," Citi analysts wrote. "We do not doubt the ability of the U.S. Treasury to keep yields contained for quite some time. The main price to pay for lowering rates in such a way is a weaker currency."
- "Budget deficits remain high, this will be a growing issue, which will either force the U.S. to tighten fiscal policy, accept higher borrowing costs, or let the dollar weaken," Société Générale's currency analysts wrote in a note entitled "Scott Bessent is the Strong Dollar's Nemesis."
- "Markets are primed for dollar debasement to resume," wrote Robin Brooks, a Brookings Institution fellow who formerly headed up foreign-exchange strategy at Goldman Sachs. "As Japan shows, it can be next to impossible to stabilize a currency once it enters a devaluation spiral. The U.S. is playing with fire with this buyback."
The bottom line: The Treasury Department did not respond to a request for comment on whether a "strong dollar" was still the government's policy, but markets are having their doubts.
