EUR/USD Holds Near 1.1680 as US Fiscal Concerns Weaken the Dollar

Key Takeaways

• EUR/USD traded around 1.1676–1.1685, marking its fourth consecutive session of gains.
• The US dollar is under pressure following the US Treasury's decision to double long-term bond buybacks to $4 billion per operation.
• Resistance levels around 1.1700–1.1705 may limit immediate gains, while geopolitical factors and Federal Reserve commentary could introduce volatility.

Current Market Overview

On August 24, EUR/USD held near multi-month highs, trading around 1.1680, as concerns over US debt and Treasury interventions continued to exert pressure on the dollar. The pair has seen a rise of approximately 0.9% over the previous week, with the US Dollar Index falling about 0.8% to 96.832. This indicates that the euro's advance is part of a broader decline in the dollar rather than a reaction to significant eurozone developments.

US Treasury Bond Buybacks and Dollar Weakness

The recent rally in EUR/USD was fueled by the US Treasury's announcement to double its purchases of longer-dated government bonds, which aims to improve liquidity and alleviate pressure in the bond market. However, this move has raised concerns regarding the US fiscal position, as the total government debt has surpassed $40 trillion, while the Treasury market is valued at approximately $32 trillion. The additional buybacks, although significant, do not address the underlying budget deficit.

Typically, rising Treasury yields due to economic growth would benefit the dollar, but the current situation complicates this relationship. Investors are demanding higher yields as compensation for fiscal and inflation risks, which has led to a weakening of the dollar.

International Diversification Supporting the Euro

The euro is also benefiting from international diversification, with overseas investors purchasing around €1.1 trillion of eurozone securities in the past year, including a record €200 billion in debt securities in June. This trend may provide a more stable demand for the euro amid ongoing concerns regarding US assets.

Geopolitical Risks and Safe-Haven Demand

Geopolitical risks, particularly regarding Iran, pose a potential obstacle to further gains in EUR/USD. US Treasury Secretary Scott Bessent is expected to announce additional sanctions against Iran, which could impact energy markets and renew demand for the dollar as a safe-haven asset. The market's reaction will depend on the scope of the sanctions and their potential impact on energy supplies.

Upcoming Federal Reserve Speech

Attention will soon shift to Federal Reserve Chair Kevin Warsh's speech at the Jackson Hole economic symposium. Current market expectations suggest a 40% probability of a US interest-rate increase in September, with full pricing for a move by December. Warsh's comments regarding monetary policy, Treasury supply, and inflation risks will be crucial in determining the dollar's trajectory and could either support or hinder the ongoing EUR/USD rally.