Dollar faces more downside as US policy credibility wanes, BofA says

The US dollar faces further downside as investors question whether Treasury efforts to suppress long-term yields and the Federal Reserve's response will weaken confidence in American policy, BofA Securities has said.

The Treasury said it would at least double the maximum size of long-dated bond buybacks to $4 billion per operation from $2 billion between September 9 and November 4.

Treasury buyback timing

BofA said the announcement's timing, outside the regular quarterly refunding process, suggested the Treasury was primarily trying to contain long-term borrowing costs rather than improve market liquidity.

Suppressing yields without corresponding fiscal restraint could leave the exchange rate as the main adjustment mechanism, placing downward pressure on the dollar.

The greenback weakened after the announcement, while gold and the Swiss franc outperformed. US equities also declined, despite lower 10-year Treasury yields, indicating renewed concern about policy credibility.

Fed response and structural risks

The Fed's response will be critical. Accommodative financial conditions, particularly if the central bank absorbs increased Treasury bill issuance through its balance sheet, would strengthen the case for selling the dollar against higher-beta currencies.

BofA said weakness across both funding and risk-sensitive currencies suggested the dollar's problems may be structural rather than a temporary response to lower interest rates. Demand for protection against dollar declines has increased in options markets, particularly against the euro, Swiss franc and Swedish krona.

Still, short- and longer-dated currency volatility remains historically inexpensive.

BofA adds NZD/USD long

BofA added to its dollar shorts by recommending a long position in NZD/USD at 0.5957, with a target of 0.62 and a stop at 0.58. The bank expects two additional rate increases from the Reserve Bank of New Zealand.

Weather-related disruption to global food supplies could also support New Zealand's export prices and currency. Technical indicators have turned more constructive after NZD/USD broke above two resistance levels. The main risk is an equity selloff that pressures higher-beta currencies.

What it means for Nigeria

For Nigeria, a weaker dollar could ease some pressure on the naira and reduce the cost of imports. But the main risk identified by BofA, a global equity selloff that hits higher-beta currencies, could still spill over into emerging markets and keep the naira under stress.