The US appears to be following in Japan’s footsteps. By attempting to control yields, the Treasury risks weakening the US dollar, as bond-market spreads may no longer support the greenback. Let’s examine these developments and develop a trading plan for the EUR/USD.
The article covers the following subjects:
Major Takeaways
- The Treasury plans to lower Treasury yields.
- The Fed risks losing credibility.
- The government’s policy clashes with the central bank.
- Short positions on the EUR/USD can be considered below 1.167.
Weekly Fundamental Forecast for Dollar
If FOMC officials start insisting that developments in the US Treasury market have nothing to do with eroding confidence in the Fed, the truth may be closer than it appears. Investors continue to sell the US dollar amid fears that the debt crisis could evolve into a currency crisis. How else can one explain soaring EUR/USD quotes amid falling stock indices, a rally in Brent, and stabilizing Treasury yields?
When the government and central bank begin pulling in opposite directions, little good can be expected for the currency. Notable examples include the pound’s collapse in late 2022 and the yen’s decline in 2025–2026. In both cases, Prime Ministers Liz Truss and Sanae Takaichi unsettled markets with fiscal stimulus measures while the Bank of England and Bank of Japan were tightening monetary policy. The Fed is currently pursuing balance-sheet reduction, or quantitative tightening. Meanwhile, the US Treasury is implementing measures that resemble quantitative easing.
According to Scott Bessent, the Treasury has more than enough tools to push Treasury yields lower, and long-term bond buybacks could significantly exceed the announced minimum of $4 billion. In other words, the bond market has become detached from fundamentals, and the Treasury intends to bring it back into line with reality.
US Dollar and 30-Year Treasury Yield
Source: Bloomberg.
All of this is reminiscent of Japan’s experience, when attempts to control bond yields ultimately contributed to a significant weakening of the yen. Moreover, based on bond-market yield spreads, the USD/JPY still appears significantly overvalued.
According to Citi, falling bond yields and financial repression are new bearish factors for the US dollar, alongside a cooling US economy and diminishing prospects for further Fed tightening.
By taking steps to lower Treasury yields, the Treasury Department is effectively encroaching on the central bank’s role. The Fed may retain its independence, but from the market’s perspective, that distinction is becoming increasingly irrelevant. The irony is that Donald Trump reportedly considered Scott Bessent for the Fed chair position, but Kevin Warsh ultimately took the job. The current situation therefore resembles an attempt by the Treasury Secretary to throw a wrench into the new FOMC chair’s plans.
The US dollar may be the main casualty, but markets tend to shoot first and ask questions later. The bond market has gradually stabilized; now the foreign exchange market should follow suit. Yield spreads suggest that the EUR/USD pair’s rally has gone too far. Japan’s experience, however, suggests otherwise.
Weekly Trading Plan for EUR/USD
In this context, selling pressure will intensify if the EUR/USD slides below 1.167. However, if bulls manage to defend this level, the pair could advance toward 1.180.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
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