BofA says dollar faces downside on policy credibility doubts

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BofA Securities said the U.S. dollar faces further downside as investors question whether Treasury efforts to suppress long-term yields and the Federal Reserve's response will weaken confidence in American policy. The Treasury said it would at least double the maximum size of long-dated bond buybacks to $4 billion per operation from $2 billion between September 9 and November 4. BofA said the announcement's timing, outside the regular quarterly refunding process, suggested the Treasury was primarily trying to contain long-term borrowing costs rather than improve market liquidity. Suppressing yields without corresponding fiscal restraint could leave the exchange rate as the main adjustment mechanism, placing downward pressure on the dollar. The greenback weakened after the announcement, while gold and the Swiss franc outperformed, and U.S. equities declined despite lower 10-year Treasury yields, indicating renewed concern about policy credibility. The Fed's response will be critical, as accommodative financial conditions, particularly if the central bank absorbs increased Treasury bill issuance through its balance sheet, would strengthen the case for selling the dollar against higher-beta currencies. BofA added to its dollar shorts by recommending a long position in NZD/USD at 0.5957, with a target of 0.62 and a stop at 0.58, and expects two additional rate increases from the Reserve Bank of New Zealand.

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⛏Gold Futures
GOLD
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Gold outperformed as dollar weakened and policy credibility concerns rose.

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