The U.S. dollar’s near-term trajectory is increasingly tied to the Federal Reserve’s policy credibility and the Treasury’s efforts to manage long-term borrowing costs, according to BofA Securities.
The bank highlighted that investors are questioning whether Treasury buybacks—expanded to $4 billion per operation from $2 billion between September 9 and November 4—will effectively suppress long-term yields without eroding confidence in U.S. policy. The announcement, made outside the regular quarterly refunding cycle, was framed as a targeted measure to contain borrowing costs rather than enhance market liquidity.
Market reactions following the announcement underscored the shift in sentiment. The greenback weakened, while gold and the Swiss franc gained ground. U.S. equities also declined despite a drop in 10-year Treasury yields, signaling broader concerns about policy credibility and its impact on risk appetite.
BofA noted that the dollar’s struggles may reflect structural challenges rather than a temporary response to lower interest rates. Demand for protection against dollar declines has risen in options markets, particularly against the euro, Swiss franc, and Swedish krona, though short- and long-dated currency volatility remains historically low.
The Reserve Bank of New Zealand’s expected policy path also entered the dollar’s calculus. BofA anticipates two additional rate hikes from the RBNZ, while weather-related disruptions to global food supplies could bolster New Zealand’s export prices and support its currency. Technical indicators for the NZD/USD pair have turned more constructive after breaking above two resistance levels, though risks remain if a broader equity selloff pressures higher-beta currencies.
BofA’s trade recommendation on NZD/USD reflects this view, suggesting a long position at 0.5957 with a target of 0.62 and a stop-loss at 0.58. The pair was trading at 0.5981 on August 20, up 0.66% for the session.
