Dollar Slips Toward Seven-Month Low as Yen Rallies and Buyback Plans Loom

The dollar fell toward its weakest level in nearly seven months on Wednesday, dragged down by a stronger yen as traders waited for the US Treasury's buyback announcement and key inflation data later this week.

The Bloomberg Dollar Spot Index dropped as much as 0.2% during the session, closing in on its lowest since Feb. 18. The decline was led by gains in the yen, the second-biggest component of the gauge. Japan's currency rose 0.5%, pushing its advance this month to about 4%.

Bessent Dares Traders on the Yen

The greenback came under fresh pressure after US Treasury Secretary Scott Bessent challenged traders to test his resolve on strengthening the yen. Bessent said that when he makes market calls these days, he is effectively doing so with inside information.

The comments rank among his most strident yet in an extraordinary campaign to bend markets to his will. In the words attributed to him, he told traders: "I Am the House."

Buyback Size in Focus

Bessent is also set to reveal how far he is initially willing to go to restrain US bond yields through an expanded buyback programme. The Treasury Department is expected to announce later Wednesday the size of the following day's operation to repurchase outstanding 10- to 20-year securities.

Mohit Kumar, chief economist and strategist for Europe at Jefferies International, said the first operation needs to be big to move markets. "To create a market impact, Bessent would need to do the first operation of greater than $4 billion, and we would not be surprised if the first operation is of a much larger size, potentially $8 billion to 10 billion," he said.

Researchers at JPMorgan Chase & Co. expect the US Treasury will likely not provide further information on the size of its buyback operation.

Inflation Data and Fed Odds

Traders are now focused on Friday's US inflation data, which may shape expectations for the Federal Reserve's policy decision next week. Money markets assign about a 60% probability that the central bank will raise interest rates by a quarter point.

Options metrics show traders remain bearish on the dollar over the short term on aggregate. They still see room for the greenback to gain against the euro and the pound, however, as elevated energy prices pose a particular headwind for both currencies. Brent crude rose to $100 a barrel on Wednesday amid attacks between the US and Iran.

For Nigeria, a softer dollar index and any pullback in US bond yields would ease pressure on frontier currencies, while crude at $100 a barrel supports dollar inflows into the federation account. Traders will watch Friday's US inflation print for direction before the Fed meets next week.