The bold intervention by U.S. Treasury Secretary Scott Bessent, aimed at containing a potentially damaging rise in U.S. borrowing costs, has raised concerns among some investors that the dollar will ultimately pay the price.

Some market participants see this move as a potential turning point, indicating Washington's shift towards a more proactive role in keeping its borrowing costs low. This follows other recent efforts to curb rising long-term bond yields, reviving concerns that US policy could weaken confidence in the dollar and push investors towards alternatives.

Gerald Gunn, chief investment officer at Reed Capital, a multi-family wealth management firm in Singapore, said the dollar would certainly be the biggest casualty. He believes Piscent is deliberately pushing down long-term real returns and signaling his acceptance of a weaker dollar in order to keep the economy supported.

Jan added that he would move towards further diversification away from the dollar.

The Treasury doubles its purchases of long-term bonds.

The U.S. Treasury Department announced Wednesday that it will at least double its planned purchases of outstanding bonds with maturities between 10 and 30 years, after borrowing costs jumped to multi-year highs, making Besent the most interventionist U.S. Treasury Secretary in the markets in decades.

This move represented a departure from the ministry's long-standing approach to debt management, which is based on regularity and predictability, an approach that Bessent himself endorsed in a speech he delivered in November.

Any attempt to deliberately drive down U.S. Treasury yields could reduce the attractiveness of dollar-denominated debt compared to assets in other markets. If investors perceive the move as aimed at making it easier for the U.S. government to borrow more, it could also put downward pressure on the value of the U.S. dollar.

The Bloomberg Dollar Index remained near its lowest level in three months during Thursday's trading, after falling by about 0.8% in the previous session. The Japanese yen, Swiss franc, and New Zealand dollar were among the biggest gainers against the US dollar on Wednesday.

Fears that the dollar will become the victim

Amir Anwarzadeh, a strategist at Asmtric Advisors in Singapore, said the bond buyback plan comes just weeks after the United States joined Japan in intervening to support the yen, increasing the sense that policymakers are very concerned.

He explained that the goal is not to weaken the dollar as much as they are aiming to stabilize bond yields, but added that the dollar will be the victim that will bear the cost of this intervention.

Bloomberg Intelligence also sees the move as potentially negative for the dollar. Stephen Chiu, senior emerging markets foreign exchange strategist, said traders might view it as an attempt to temper market pricing in risks to US fiscal sustainability and the Federal Reserve's credibility in combating inflation.

These moves come at a time when long-term Treasury bond yields have risen sharply, after investors demanded extra returns to compensate them for lending to a government facing an increasing debt burden.

Bond yields jump as financial concerns escalate

Concerns about inflation and competition stemming from a wave of corporate borrowing have increased pressure on the bond market, pushing the yield on 30-year US Treasury bonds to levels not seen since 2007, despite declining expectations of a near-term interest rate hike by the Federal Reserve.

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Washington had begun showing signs of concern before Wednesday's repurchase announcement. After the US joined Japan in supporting the yen late last month, Bessent raised the possibility of using a Federal Reserve tool to fund further intervention if needed.

These moves were seen as reducing the risk of Japan having to sell US Treasury bonds to obtain dollars in order to defend its currency.

With US President Donald Trump’s stances sometimes including support for a weaker dollar, these actions have reinforced a feeling among some investors that Washington is becoming more willing to intervene in the markets in order to keep borrowing costs under control.

Strategists at Evercore ISI, including Marco Casiraghi, said in a research note that Bisent would likely welcome these moves in the currency market, given the Trump administration's emphasis on the benefits of a weaker dollar as a means to boost U.S. competitiveness and reduce trade imbalances.

Washington faces two difficult choices

Andrew Canopy, head of fixed income at Franklin Templeton in Melbourne, believes the bigger story is unfolding in the currency markets. He said that Pisent is effectively sending a message that Washington is prepared to sacrifice some of the dollar's strength in order to keep long-term bond yields somewhat under control.

He added that an outlet is needed to relieve the pressures, noting that the alternative is to address the structural problems plaguing the US economy, a much more difficult path, leaving policymakers with two options: either manage bond yields or allow the dollar to weaken.

The dollar has faced similar concerns before regarding the impact of US policies. The Federal Reserve's massive bond-buying programs have previously raised fears that attempts to lower yields and expand the central bank's balance sheet could weaken the currency.

More recently, investors have reduced their exposure to the dollar amid Trump’s threats of tariffs and his pressure on the Federal Reserve, but none of these developments has been able to dislodge the dollar from its dominant position in global markets.

The dollar still has supporting factors.

Not all investors see an immediate threat to the dollar. Masahiko Lo, senior fixed-income strategist at State Street Investment Management, said the U.S. currency still has strong near-term support from AI-related investment flows into U.S. stocks, along with rising oil prices.

But he pointed out that the recent measures simultaneously reinforce the long-term justifications for further abandoning reliance on the dollar and for a decline in the value of the currency.

He added that the expansion of sovereign AI initiatives and data center projects outside the United States could gradually erode the exceptional advantage the United States currently enjoys in attracting capital flows.

Mark Cranfield, market strategist at MLIV, said the dollar is poised to become the currency that could give Asian investors more room to maneuver, as investors balance buying back U.S. Treasury bonds against the widening U.S. fiscal deficit.

The yen and gold are emerging as alternatives to the dollar.

Shoki Omori, chief Japan fixed income strategist at Deutsche Bank, said that increased liquidity support in the U.S. Treasury bond market comes, by its very nature, at the expense of the dollar.

He noted that price movements were clearly significant, as short-term bonds were sold off while expectations of an interest rate hike by the Federal Reserve remained stable, yet the dollar declined broadly, indicating that investors are beginning to look beyond interest rate differentials and are reassessing the overall mix of US policies.

Omori expects the Japanese yen to be the biggest beneficiary over the next 3 to 6 months, with recent US moves helping to remove two key factors that had been putting pressure on the Japanese currency: Japan’s need to sell US Treasury bonds to finance its interventions in the currency market, and the pressure resulting from rising US long-term bond yields.

Omori also prefers gold as an alternative to the dollar, followed by the Swiss franc and the euro.

Omori concluded that the US Treasury can repurchase its bonds, but it cannot repurchase dollars.