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Stephen Englander: Why the U.S. Treasury likes a weak dollar

Section: Daily Dispatches

Steven Englander is the head of research and strategy at Rafiki Capital. He was previously the head of G10 currency strategy at Citigroup and the chief U.S. currency strategist at Barclays.

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By Steven Englander
Bloomberg News
Saturday, March 16, 2018

The U.S. Treasury has been stealthily weakening the dollar. It isn’t clear if it is doing so consciously, but since a weaker dollar suits Treasury leadership, there probably isn’t too much concern. The key is that the Treasury is flooding the market with short-term debt that neither domestic nor foreign investors are very interested in buying. The Federal Reserve is capping the yield on the debt with its promises to raise rates gradually and to keep rates below long-term levels for some time. Taken together, we have a surge of short-term issuance at very negative real rates.

The skew in issuance is striking. Since August 2017, Treasury bills, which mature in one year or less, have represented 63 percent of the increase in bills, notes and bonds, as the chart below shows. As a share of the total stock, bills have gone from 14 percent to 16 percent during the past six months.

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So how do you attract buyers when supply is booming and the yield is held down by your friendly central bank? The discount that foreign buyers require to induce them to buy comes through a weaker exchange rate. If Treasury is issuing so much, and you are getting paid relatively little in terms of rates, you want potential upside via foreign-exchange gains. That translates into weaker dollar spot prices. Nudging the dollar down by more than the fundamentals would justify increases the odds of eventual appreciation, so the added supply at low yields winds up finding buyers.

I call it stealth intervention, even though the Treasury isn’t engaged in buying or selling either dollars, or foreign currencies. However, it is creating conditions where the rational market outcome is that the dollar must be weaker to create demand for all the low-yield debt that’s being issued. ...

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