Hedge Funds Bet on Dollar Weakness After U.S. Treasury Expands Buyback Program

Hedge funds are accelerating their sell-off of the U.S. dollar, driven by the U.S. Treasury's decision to expand its Treasury buyback program. This move, aimed at lowering long-term borrowing costs, has sparked concerns among investors that aggressive interest rate management by the Treasury could weaken confidence in the dollar.

Since Treasury Secretary Scott Bessent announced plans to at least double the buyback of Treasuries, the dollar has seen a sharp decline. The dollar index (DXY), which measures the dollar's value against six major currencies, fell approximately 0.8% from 99.66 to 98.83. Spot foreign exchange markets have also witnessed increased dollar selling, particularly among hedge funds, who are actively betting on dollar depreciation.

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Especially clear reactions from hedge fund clients. Dollar selling has accelerated amid sustained dollar supply throughout August.

"There has been a clear reaction from hedge fund clients," noted Torsten Schoeneborn, co-head of G10 FX trading at Barclays. "Dollar selling has accelerated amid sustained dollar supply throughout August." In contrast, Schoeneborn observed no clear directional shifts in fund flows from long-term investors like pension funds and asset managers.

Market participants are speculating that Bessent's proactive intervention in the bond market, intended to reduce U.S. borrowing costs, might inadvertently place pressure on the dollar. The fear is that a shift towards active Treasury yield management could amplify concerns about U.S. market intervention, thereby eroding the dollar's credibility. This sentiment is further evidenced in the currency options market, where the premium paid to hedge against dollar downside risk has reached its highest level since February.

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The Treasury's Treasury buyback announcement has led to increased hedging demand against dollar downside risk across the FX options market.