US Treasury buy-backs this week are being read as a signal that officials are uneasy with elevated long-dated yields, rather than a pure liquidity operation. Discussion of potential fiscal consolidation has surfaced, including a fraud-cutting task force, yet scepticism persists over any near-term impact on a budget deficit close to 6%. The market focus now turns to August S&P PMI releases, where expansion is expected to continue, while DXY is seen finding support around 98.65/70 and struggling to regain 99.00.
In FX, the base case is for a gentle dollar decline: comparisons with April 2025 tariff-driven turbulence have resurfaced, but price action is framed as risk-friendly unless Treasuries and equities sell off sharply, in which case USD/CHF would fall, EUR/USD rise and high-yield FX weaken. EUR/USD is underpinned by the soft-dollar backdrop; eurozone August PMIs are expected to show mild expansion, and the ECB Consumer Expectations Survey saw three-year inflation expectations at 3.0% in March and a 2.8% reading is anticipated. EUR/USD is seen in a 1.1670–1.1710 band, while EUR/CHF has rebounded above 0.9350 with 0.9400 in view; USD/ZAR is eyed towards 15.92, then 15.75/80.
Strategies for a Softer US Dollar
We recommend derivative traders position for a softer US dollar in the coming weeks as the Treasury’s bond buyback program signals a cap on runaway yields. With the US budget deficit hovering near 6% of GDP, these interventionist measures are designed to soothe bond market anxieties. Traders should sell USD strength, especially with the Dollar Index (DXY) facing heavy resistance just below 99.00 and support sitting at 98.65.
In the options market, we suggest buying short-dated EUR/USD call options to capture a steady, risk-friendly drift higher. Today’s eurozone PMI data and elevated consumer inflation expectations near 2.8% should keep the European Central Bank on a hawkish path. We expect EUR/USD to break out of its current 1.1670-1.1710 range and edge higher as the greenback retreats.
Carry Trades and Emerging Market Opportunities
For carry trade strategies, we advise using the Swiss franc as a funding currency to buy high-yielding assets. Volatility is expected to remain low as the US Treasury stabilizes the long end of the bond market, which historically favors carry strategies. We like entering short CHF positions, targeting a move in EUR/CHF back up to the 0.9400 level.
We also see excellent opportunities to short USD/ZAR using put options to express this pro-risk view. The South African rand is currently testing support at 15.92 and could quickly target the 15.75 region as Asian currencies perform well. While El Niño-related drought risks remain a concern for later in the year, the short-term setup heavily favors the rand.
