Dollar Index Drops to 98.9 as Euro and Yen Strengthen

Key Takeaways

• The US Dollar Index fell to around 98.85, its lowest level since mid-May, after a Treasury initiative pulled long-term US bond yields lower.
• EUR/USD climbed to about 1.1674, its strongest level since late May, while USD/JPY retreated from the closely watched 160 area to around 158.55.
• The dollar remains caught between falling long-term yields and hawkish Federal Reserve signals, with the Jackson Hole symposium and September policy meeting now in focus.

The US dollar remained under pressure on Thursday as a sharp reversal in long-term Treasury yields reduced one of the currency’s main sources of support. The Dollar Index, which tracks the greenback against six major currencies, slipped to around 98.85 and traded near its lowest level in roughly three months.

US Treasury buybacks pull long-term yields lower

The immediate catalyst came from the US Treasury’s decision to expand liquidity-support buybacks for longer-dated government securities. The maximum size of each operation will rise from $2 billion to at least $4 billion for bonds in the 10-to-20-year and 20-to-30-year maturity sectors. The new limits take effect on 9 September and will remain in place through 4 November.

The announcement followed an intense global bond sell-off that had pushed the 30-year US Treasury yield as high as 5.337%, its highest level since 2007. After the buyback expansion was revealed, the yield fell towards 5.18%, while the 10-year yield eased to around 4.64%.

Falling yields can weaken the dollar because they reduce the return advantage offered by US fixed-income assets. When the gap between US yields and those available in other developed markets narrows, international investors have less incentive to hold dollar-denominated bonds purely for income.

The Treasury programme is designed to support market liquidity rather than operate as quantitative easing. The Federal Reserve is not expanding its balance sheet through these purchases. Even so, the market reaction showed that traders viewed the announcement as an important signal that policymakers were uncomfortable with the recent surge in long-term borrowing costs.

EUR/USD rises to its strongest level since May

EUR/USD advanced to around 1.1674, placing the pair at its highest level since late May and close to the 1.1700 psychological threshold. The move was driven primarily by broad dollar weakness rather than a sudden improvement in the eurozone outlook.

The euro has gained as the retreat in US yields reduced the relative appeal of the dollar. It also benefited from the unwinding of defensive dollar positions after the Treasury announcement eased immediate concerns about disorderly trading in the US bond market. Live market data placed EUR/USD close to 1.168 during Thursday’s session, after the pair had traded below 1.16 earlier in the week.

The 1.1700 area is now an important short-term test. A sustained break above it would strengthen the euro’s recent upward momentum and shift attention towards the next resistance zone around 1.1760 to 1.1800. If the pair falls back below 1.1600, however, the latest move may look more like a yield-driven spike than the start of a durable euro rally.

Europe faces its own challenge from elevated sovereign borrowing costs. German, French and Italian yields recently reached multi-year highs before easing after the US Treasury announcement. This means the euro’s advance may remain sensitive not only to US rate expectations but also to concerns about European debt, inflation and economic resilience.

Yen gains as USD/JPY retreats from 160

The Japanese yen strengthened to around 158.55 per dollar, pulling USD/JPY away from the 160 level that traders closely associate with intervention risk. Lower US yields were particularly supportive for the yen because the currency has been pressured for years by the wide interest-rate gap between the United States and Japan.

When US yields fall, the potential return from borrowing cheaply in yen to buy higher-yielding dollar assets becomes less attractive. That can lead traders to reduce carry positions, supporting the Japanese currency even without a fresh policy action from Tokyo.

The move follows a rare joint US-Japan intervention at the end of July, when the yen had weakened towards a four-decade low near 164 per dollar. The initial recovery proved difficult to sustain, showing that intervention can slow a currency move but may not reverse it permanently while the underlying yield gap remains wide.

For the yen, 160 remains the main upside marker for USD/JPY and a potential source of renewed official warnings. On the downside, the 158 area is the first test of whether lower Treasury yields can produce a broader reduction in dollar-yen carry demand.

Hawkish Fed minutes limit the dollar’s losses

The decline in long-term yields has weakened the dollar, but the latest Federal Reserve minutes complicate the bearish case. Most policymakers supported keeping the federal funds target range unchanged at 3.50% to 3.75% in July, while three voting members preferred an immediate 25-basis-point increase.

Several participants favoured a rate rise at the meeting, and many believed further tightening could be necessary if inflation failed to move lower. The minutes also showed that inflation remained above the Fed’s 2% objective, while officials continued to see upside risks to the price outlook.

These signals matter because short-term policy expectations can support the dollar even when longer-term bond yields are declining. If incoming data revive expectations of a September rate increase, the greenback could recover some of its losses. Conversely, softer inflation, consumer spending or labour-market figures would reinforce the view that the Fed can remain on hold.

Jackson Hole and bond-market stability move into focus

Currency traders are now watching whether the Treasury’s announcement can keep long-term yields contained once the initial market reaction fades. The buyback programme is small relative to the overall Treasury market and addresses liquidity rather than the structural causes of rising yields, including heavy government borrowing, persistent inflation risk and concern about the US fiscal outlook.

Attention is also turning to Federal Reserve Chair Kevin Warsh’s forthcoming Jackson Hole speech for guidance on how officials interpret the recent bond-market volatility. The next scheduled FOMC meeting takes place on 15–16 September, shortly after the expanded Treasury buybacks begin.

Until those signals become clearer, the Dollar Index may remain vulnerable near 98.9, EUR/USD may continue testing the 1.17 area, and USD/JPY could stay sensitive to any renewed rise in long-term US yields. Oil prices and geopolitical developments are additional variables because another energy-driven inflation shock could quickly restore expectations of tighter Fed policy.