Euro Maintains Gains as US Treasury Buybacks Weigh on Dollar

The EUR/USD pair extended its winning streak to a fourth consecutive session, trading near 1.1680 during Monday’s Asian hours. The euro held firm as the US Dollar came under pressure following an unexpected fiscal announcement from the Treasury Department. Officials pledged to at least double buybacks of longer-dated government debt in a bid to curb rising bond yields, with Secretary Scott Bessent indicating the program could expand beyond $4 billion. The move signals that current elevated yields may not reflect underlying economic fundamentals.

Despite the dollar’s weakness, further upside for the pair appears capped by safe-haven demand fueled by escalating Middle East tensions. Iranian Foreign Minister Abbas Araghchi dismissed impending US sanctions as a desperate measure destined to fail, while Security Chief Mohsen Rezaei warned of “earthquake-like” retaliation should President Trump escalate further. The rhetoric has reinforced risk-off sentiment across global markets.

On the European side, the single currency draws support from persistent inflation dynamics and expectations surrounding European Central Bank policy. Eurozone consumer inflation expectations for the coming year edged down to 2.9% from 3% in June, yet price growth remains well above the ECB’s 2% target. Markets continue to price the possibility of additional monetary tightening following June’s rate increase.

ECB Seen Preparing Structural LTRO Framework as Excess Liquidity Wanes

Rabobank analysts anticipate the ECB will gradually shift toward a new framework for structural Longer-Term Refinancing Operations as excess liquidity declines. The bank could begin discussions on the design of structural LTROs by year-end, though the launch timeline hinges on banks’ demand for reserves. A 12-month maturity is viewed as plausible, with the central bank likely favoring a market-driven approach. Rabobank suggests the ECB may allocate LTROs via auction rather than the fixed-rate, full-allotment procedure, aligning the tool more closely with standard refinancing operations while still supporting reserve demand.

Source link