Dollar Outlook Turns Bearish as Treasury Buybacks Add to Pressure

The outlook for the US Dollar is turning less friendly.

Citi has cut its three-month Dollar Index forecast from 102.12 to 98.34, moving from a neutral stance to a bearish one. The bank points to three pressures: larger Treasury buybacks, fading Fed hike expectations and rising political uncertainty ahead of the US midterm elections.

The Treasury move is at the centre of the story.

The US government plans to at least double buybacks of 10- to 30-year Treasuries, a move that could put downward pressure on long-term yields. For the dollar, lower yields mean less of a return advantage over other major currencies.

Fed expectations are moving in the same direction.

Markets have been scaling back bets on another rate hike, while Citi expects the ECB to raise rates by 25 basis points in September. The combination leaves the euro with more room against the dollar, with Citi lifting its three-month EUR/USD forecast to 1.1750.

USD/JPY is another pair to watch.

With the pair still close to the 160 area, renewed yen weakness could bring Japanese policy makers back into focus. That makes the next move in the dollar increasingly dependent on both market pricing and official policy signals.

Gold is benefiting from the same backdrop.

Lower Treasury yields and a softer dollar have helped push gold back above $4,500. If the dollar remains under pressure, gold could find further support, although a renewed rise in US yields would quickly change the picture.

Citi's bearish dollar call is not without risks. A renewed rise in oil prices, particularly if tensions around the Strait of Hormuz worsen, could revive inflation concerns and bring Fed tightening expectations back into the market.

For now, the dollar is facing pressure from several directions at once. The key question is whether falling yields and weaker Fed expectations can keep the pressure on — or whether stronger US data and higher inflation force the trade to reverse.