The U.S. dollar stood at three-month lows on Thursday after the Treasury Department moved to calm a bond market rout that had pushed long-end yields to their highest since 2007, sapping support for the greenback.
The dollar index , which measures the U.S. currency against six other units, was at 98.854, around its lowest level since mid-May. The euro was at $1.1674, perched at the highest level since late May.
Investors have been grappling this week with a sharp selloff in the global bond market on mounting concern about soaring government debt and the spectre of higher oil prices due to the lack of progress in ending the U.S.-Israeli war on Iran.
The 30-year Treasury yield rose to a 19-year high of 5.337% earlier this week, prompting the U.S. Treasury to unveil plans on Wednesday to double liquidity support buyback operations for longer-dated bonds.
"The buyback is not QE (quantitative easing) but the Treasury blinked," said Prashant Newnaha, senior rates strategist at TD Securities, noting the timing was interesting as it came ahead of an auction for 20-year notes.
That, analysts said, would help ease pressure on the long end of the curve without the Federal Reserve expanding its own balance sheet, although it does complicate the U.S. central bank's monetary policy work.
"While the buyback begins on September 9, more interesting was the news around further details on future buybacks to be released on November 4," TD's Newnaha said. "November 4 is the day after the midterm elections. Quite clearly the Treasury is leaving the door open to increase future purchases."
The implication for the dollar is that it has lost one of its strongest remaining pillars of support and the currency's high for the year may be behind it, said Matt Simpson, senior market analyst at StoneX.
"U.S. Treasury has just made it clear they don't want to see the 30-year yield at its pre-global financial crisis level of 5.3%. The question now is whether bond traders want to play nicely and support the market to cap yields," he said.
The dollar weakness provided some relief to the Japanese yen as the fragile currency pulled away from the closely watched 160 level. The yen was last at 158.55 per dollar, giving up some of its overnight gains.
The yen has been in the spotlight after a rare joint U.S. and Japan intervention at the end of July to pull the currency away from the 40-year low of near 164 failed to leave a lasting impact.
Sterling was at $1.3614, just shy of the three-month high, while the Swiss franc was slightly weaker at 0.8 per U.S. dollar, easing away from the two-month high it hit in the previous session.
Wells Fargo economists said the Treasury likely expected to get good bang for its buck by surprising people with an unexpected decision. "It reminds us a bit of the tactical moves on yen intervention. Lower long-end yields = happy Treasury leadership. And they got that," the note added.
