The U.S. Treasury is propping up the yen and pressuring U.S. bond yields, pushing the dollar towards a seven-month low! Can the CPI reverse the bearish trend?

With the sharp rebound of the yen exchange rate, the dollar index has approached its lowest level in nearly seven months, as traders anxiously await the U.S. Treasury's bond repurchase announcement and the official CPI data later this week. One of the benchmark indices measuring the strength of the dollarthe Bloomberg Dollar Spot Indexfell by 0.2% on Wednesday, nearing its lowest level since February 18. The recent decline of the dollar has been primarily driven by the rise of the yen, which is the second-largest sovereign currency component in this index. The yen rose by 0.5% against the dollar, increasing its cumulative gain for the month to about 4%. The direct driver of this wave of "dollar depreciation" is the strengthening of the yen, changes in relative interest rate expectations, and policy interventions that collectively compress the profit margins for dollar bulls. It is noteworthy that the current decline of the dollar primarily reflects a repricing of cross-currency positions and interest rate spreads, and cannot be directly used to conclude that global reserve funds are fully retreating from the dollar. The yen has appreciated by about 4% this month, and U.S. Treasury Secretary Scott Basset has raised the policy risk of shorting the yen with his firm statement, "I am the forex dealer." The expectation of interest rate hikes from the Bank of Japan provides support for the yen: the yield on Japan's 10-year government bonds has reached 3%, and Fitch believes that rising domestic yields may attract Japanese institutions to keep more funds at home. Consequently, the appeal of carry trades dominated by yen financing may decrease, prompting desires to close positions that involve buying back yen assets and reducing exposure to overseas assets. The dollar nears a seven-month low as U.S. bond repurchases and inflation data become the focus. U.S. Treasury Secretary Scott Basset challenged traders to test his determination to strengthen the yen and stated that his market judgments are actually based on insider information, putting further pressure on the dollar. These remarks are among Basset's firmest stances to date, as he embarks on an unusual campaign to steer the market according to his wishes. As shown in the above chart, Basset confronted traders betting on a decline in the yen: "I am the dealer"the dollar index is expected to record its lowest closing level since February of this year. Basset is also set to reveal the extent of his actions to curb the rising yields of U.S. Treasury bonds through an expanded bond repurchase plan. The Treasury is expected to announce the size of the repurchase operations later on Wednesday, targeting U.S. Treasury bonds with maturities of 10 to 20 years. To impact the market, the first operation by Basset needs to exceed $4 billion; it wouldn't surprise us if the first round of operations were much larger, possibly reaching $8 billion to $10 billion, said Mohit Kumar, Chief Economist and Strategist for Jefferies International Europe. However, the market research team at JPMorgan believes that the U.S. Treasury is unlikely to provide further details on the specific size of its repurchase operations. Traders are also eyeing U.S. inflation data set to be released on Friday, which may help shape market expectations for the Federal Reserve's policy decision next week. The money market estimates a roughly 60% probability that the Fed will raise interest rates by 25 basis points. Options indicators show that traders generally remain bearish on the dollar in the short term. However, they believe there is room for an increase in the dollar against the euro and the pound, as high energy prices pose particularly evident bearish pressures on these two currencies. Amid mutual attacks between the U.S. and Iran, Brent crude oil rose to $100 per barrel on Wednesday. As the yen rebounds and U.S. bond repurchases apply pressure, can the dollar turn the tide with the CPI? In addition to the strengthening of the yen and changes in relative interest rate expectations, U.S. bond repurchases represent another policy variable that the dollar faces, with the key being whether the actual scale can exceed market expectations. The Treasury previously announced an increase in the single liquidity support repurchase size for U.S. Treasury bonds maturing in 10-20 years and 20-30 years from a maximum of $2 billion to at least $4 billion, effective September 9. Jefferies believes that the first operation needs to exceed $4 billion to have a market impact, and it could even reach $8 billion to $10 billion. If the repurchases effectively suppress long-end U.S. Treasury yields and narrow their yield advantage relative to overseas bonds, the dollar will face further pressure; however, the repurchase itself does not improve the fiscal deficit, and the ongoing effects still depend on Treasury supply and inflation trends. The focus of dollar trading is on the yield changes and policy signals triggered by the repurchase, rather than simply interpreting the repurchase amount as an equivalent dollar sell-off. The conflict in the Middle East has led to a clear divergence in dollar movements. U.S. military strikes against Iranian oil tankers and Irans retaliatory measures, along with Houthi attacks on Saudi energy facilities, pushed Brent crude oil to $100.07 per barrel on September 9. High oil prices will exacerbate trade bills for energy-importing economies and squeeze real income, placing dual pressure on growth and inflation for the euro and pound; Japan is also bearing the rising costs of energy imports, but current expectations for interest rate hikes and intervention risks provide more direct support for the yen. Thus, a decline in the dollar index can coexist with support for the dollar against the euro and pound, and strategies betting on a generalized weakening of the dollar may not fully cover this divergence. The U.S. CPI on September 11 will be key to determining whether the dollar index can regain support from the Feds interest rates. The U.S. Bureau of Labor Statistics confirmed that the August CPI will be released at 8:30 AM ET on that day; currently, the money market has priced in about a 60% probability of the Fed raising rates by 25 basis points next week. If core inflation and service prices are significantly above expectations, market expectations for rate hikes may further intensify, supporting a dollar rebound by pushing up short-term U.S. yields; conversely, if inflation cools significantly, pressures for rate hike expectations could retract after short-term U.S. Treasury yields, which may exacerbate pressure on the dollar alongside the strengthening yen and expectations of the repurchase suppressing long-end yields.