The dollar weakened sharply on Wednesday, as an unexpected increase in the US Treasury's long-dated bond repurchase program triggered a rebound in the Treasury market, driving long-term yields noticeably lower. The Bloomberg Dollar Spot Index fell as much as 0.7% during the session, marking its steepest three-week decline and touching its lowest point since mid-May. The greenback dropped against all major currencies, with the Swiss franc and Swedish krona leading gains, while the yen also strengthened considerably.

Market participants attributed the move to the Treasury's sudden boost in long-term bond buybacks, which alleviated the persistent selling pressure in the long end of the Treasury market and signaled to investors that the department is closely monitoring bond market volatility. Recent weeks have seen sustained selling in long-dated Treasuries, with the 30-year yield climbing to its highest level since 2007. Concerns driving the selloff include the rapid expansion of US federal debt, energy and inflation risks stemming from the Iran conflict, a surge in corporate bond issuance fueled by the artificial intelligence investment boom, and US inflation running above the Federal Reserve's 2% target since 2021.

Following the Treasury's expanded buyback announcement, long-dated bonds quickly rebounded, with the 30-year yield dropping approximately 8 basis points at one point. The pullback in Treasury yields further eroded the dollar's interest rate advantage, becoming a key factor behind its decline on the day. Meanwhile, market expectations for additional near-term rate hikes by the Fed have also cooled. Investors now widely anticipate that the central bank is unlikely to raise rates again before December at the earliest.

Markets are awaiting the release of the Fed's latest meeting minutes later on Wednesday to gauge whether voices supporting further monetary tightening have grown louder and how policymakers assess current inflation risks. Jane Foley, head of FX strategy at Rabobank, noted that the stabilization in the Treasury market created the conditions for the dollar's pullback. She pointed out that while inflation and bond supply risks remain, the rising share of US Treasuries held by hedge funds could also make the bond market more sensitive to volatility.

Notably, the dollar's reaction to the Treasury's buyback news was relatively pronounced. Despite little change in short-term rates, the greenback fell rapidly, suggesting investors may interpret the Treasury's move as an attempt to ease pressure in the long-dated bond market. Brendan Fagan, macro strategist at Bloomberg, noted that although the Trump administration has consistently advocated a "strong dollar" policy, a series of recent actions—including joint US-Japan intervention in the foreign exchange market and Treasury Secretary Bessent's comments about certain currencies being undervalued—have made market assessments of the administration's actual exchange rate policy more complex.

The weaker dollar also fueled a notable yen rebound. The dollar fell about 0.9% against the yen, with the Japanese currency strengthening to 158.17 per dollar, its strongest level in over a week. The yen had appreciated significantly earlier this month following the joint US-Japan intervention, but gradually gave back those gains and remains down roughly 0.7% against the dollar since August. Howard Du, strategist at TD Securities, said the broad dollar decline on Wednesday was primarily driven by the Treasury announcement, with the signal being that the department is closely watching the sustained selling in long-dated Treasuries this week.

Overall, the Treasury's unexpected expansion of long-term bond buybacks has temporarily eased pressure on the bond market, but it has also created new downside pressure on the dollar by pushing long-term yields lower. With Fed rate hike expectations cooling in the near term, bond market movements and the upcoming release of the Fed's meeting minutes will be key factors shaping the dollar's next direction.