Is the U.S. debt buyback comparable to Japan's YCC? The dollar is unlikely to enter a "devaluation spiral," but the trend of pressure cannot be ignored.

The commitment to repurchase U.S. Treasuries that led to a sharp fluctuation in the market this week has prompted comparisons between this move and the policies of Japanese authorities. In Japan, the policy aimed at controlling borrowing costs (specifically, yield curve control, YCC) ultimately resulted in a prolonged weakening of the yen. Recently, Wall Street has also issued a warning that the dollar may become the biggest loser in the U.S. government's intensified Treasury repurchase activity. Data shows that the dollar is currently hovering near a three-month low and is on track for its worst weekly performance this month. Robin Brooks, a senior researcher at the Brookings Institution, stated that this action by the U.S. government is the clearest signal yet that the U.S. is following in Japan's footsteps by devaluing its currency to tackle related issues. He bluntly remarked that the U.S. government is playing with fire. As global long-term bonds have come under pressure recently, U.S. Treasury Secretary Scott Besson dropped a bombshell on Wednesdaydoubling the weekly liquidity support repurchase operation scale for 10 to 30-year bonds from $2 billion to at least $4 billion. This operation quickly suppressed long-end yieldsthe 30-year Treasury yield plunged nearly 10 basis points to 5.18% within hours of the announcement. However, U.S. Treasuries have since given back some of the gains triggered by this news. As of this writing, the 30-year Treasury yield stands at 5.26%, while the 10-year yield has also returned above 4.7%. The intensified repurchase initiative for long-term bonds is pushing the dollar into an awkward position. Mohit Kumar, chief economist for Jefferies International in Europe, remarked, Any form of yield control will undermine the dollar. Gerald Gan, Chief Investment Officer at Singapore's Reed Capital, candidly stated, The dollar is undoubtedly the biggest victim. He believes Besson is deliberately depressing long-term real rates and signaling a tolerance for a weaker dollar to keep the economy functioning. Standard Bank's G10 strategy chief, Steven Barrow, also warned that lowering bond yields through repurchase operations will only increase the pressure on the dollar without addressing the fundamental budget deficit driving higher Treasury yields. However, some analysts believe that comparing the U.S. actions to those of Japan has its limitations. The so-called Abenomicsthe economic policies implemented by former Japanese Prime Minister Shinzo Aberelied on large-scale monetary easing to stimulate economic growth. This included a massive quantitative easing program that effectively increased the issuance of yen to purchase government bonds, thereby significantly devaluing the yen. The U.S. Treasury's repurchase of bonds cannot be equated with such monetary stimulus, nor has the U.S. opted to accept currency devaluation as the necessary cost to keep bond yields low. Steven Barrow stated that the U.S. governments intervention to support the yen last month proves this point. At that time, the U.S. intervened using euros instead of dollars, thereby protecting the dollar. Meanwhile, because Japan does not need to sell U.S. Treasuries to obtain dollars necessary for supporting the yen, U.S. Treasury yields were also shielded. But he added, The problem is that the U.S. cannot have its cake and eat it too. Forex traders are currently awaiting comments from Federal Reserve Chair Waller at the Jackson Hole Global Central Bank Annual Meeting at the end of this month. If Waller makes hawkish remarks that counter market expectations for rate cuts, the dollar may find some respite. Capital.com senior market analyst Daniela Hathorn wrote, Waller's views on persistent inflation, the recent rise in long-term bond yields, and the future size and role of the Federal Reserve's balance sheetany related statements could trigger a massive repricing in the U.S. Treasury market, dollar, gold, and stock markets. However, if the Federal Reserve resists pressure to raise interest rates, the narrative around dollar depreciation may gain further market support. Sentiment towards the dollar in the options market has reached its most pessimistic level since February. Even though the dollar's spot price is declining, this situation still indicates that traders are betting on further weakness in the dollar. Robin Brooks stated, Once a currency enters a downward spiral, stabilizing it can become extremely difficult.