US Dollar: Buyback impact stays marginal – BNY

BNY’s Geoff Yu notes that U.S. cross‑border exposures have stabilized, with Dollar FX hedges broadly unchanged and U.S. equity holdings recovering as risk sentiment improves. He argues the July Fed decision mattered more for FX than the Treasury buyback, and that the Dollar has acted as a release valve while diversification away from U.S. assets remains selective.

FX positioning stabilizes after Fed

"U.S. exposures have stabilized. Based on the latest weekly update to our cross-border net U.S. asset positioning, non-U.S. domiciled investors aren’t pushing to further reduce their exposures. Our data show that outright FX hedges, measured by cross-border dollar holdings, have remained largely unchanged over the past two weeks, while there has been some improvement in equity holdings as risk sentiment stabilized."

"The July Fed mattered more for FX. The drop in U.S. exposures was mostly driven by an increase in dollar hedges. In hindsight, although the market reacted to the Treasury buyback decision in a similar manner to any policy result that causes a drop in U.S. real rates, the Fed continues to anchor the front end of the curve, and this is where FX sensitivities matter more."

"The buyback’s market impact proves marginal. We stress that this matters in both directions for sentiment. As we highlighted yesterday, the rally and yield retrenchment suggest that the maneuver had limited direct effects on the market beyond the initial impact of the announcement."

"If U.S. data and corporate earnings deliver, there is no strong pull toward comprehensive rotation, especially given the lack of alternatives. The dollar has already served its purpose as a release valve, but diversification remains selective as the U.S. macro narrative stays unchanged."

"Watch dollar cash flows, FX hedging, inflation expectations and U.S. data. A sustained deterioration across these signals would confirm a shift from tactical diversification to structural U.S. exposure reduction."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)