The dollar's slide to its weakest level since May reflects a shift in the rates backdrop rather than a single catalyst, with the Treasury's expanded buyback plan adding to pressure on medium- and long-term yields already shaped by lower Federal Reserve expectations. HSBC said near-term price action is likely to remain driven by incoming data and rate pricing rather than the structural concerns building beneath the surface, meaning a September Fed hold could extend the greenback's decline.

On the other side, the euro has found support from a narrower short-term rate differential with the United States, along with firmer regional PMI readings, elevated oil prices and the prospect of another European Central Bank rate hike. HSBC said that combination leaves EUR/USD positioned to extend gains if the Fed stays on the sidelines.

---

Earlier:

Gold rises to the highest since May 15 as dollar doom spreads

Westpac says dollar's structural headwinds outweigh recent resilience, see EUR/USD and GBP/USD higher

---

HSBC said falling US real yields and a narrowing rate gap with Europe are weakening its mildly bullish dollar view, with more downside likely if the Fed remains on hold in September.

The dollar has fallen to its lowest level since May after the US Treasury said it would at least double long-term bond buybacks, according to HSBC. The bank said the move has added to a backdrop of lower medium- and long-term yields, higher inflation expectations and falling US real yields — nominal yields stripped of expected inflation — all of which are increasingly testing its mildly bullish outlook for the currency. Buybacks work by having the Treasury repurchase outstanding older securities, which reduces the amount of long-dated debt trading in the market and can ease pressure on the yields those bonds carry.

HSBC noted that the dollar index, the benchmark gauge of the greenback against a basket of major currencies in which the euro carries the largest weight, has declined about 2.5% since the July Federal Reserve meeting, a move it attributed largely to shifting rate expectations rather than a single event. Even as structural concerns around the currency build, the bank said near-term dollar moves remain primarily a function of economic data and rate pricing. That means the greenback's direction in the coming weeks will likely depend on how incoming data shapes the outlook for Fed policy.

On the other side of the ledger, HSBC pointed to a narrowing two-year rate differential between the US and the eurozone as a key support for EUR/USD, as markets scale back expectations for further Fed tightening. That dynamic has also been reinforced by stronger eurozone PMI data, elevated oil prices and growing expectations of another rate hike from the European Central Bank, all of which have added upward pressure to the single currency. Such rate gaps matter because they set the yield investors earn by holding one currency over another, and EUR/USD, the most heavily traded currency pair in the world, is typically where shifts in that balance show up first.

Looking ahead, HSBC said falling US real yields and a narrower short-term rate differential favor continued dollar weakness, particularly if the Fed confirms an extended pause at its September meeting. If the Fed remains on hold, the bank sees scope for near-term dollar softness to persist, leaving the currency's direction closely tied to how the rate outlook on both sides of the Atlantic continues to evolve. In practice, that puts the focus on the run of US data feeding into the Fed's September decision, and on whether eurozone inflation and PMI releases keep the ECB positioned for another hike. Gold, which is priced in dollars, has already climbed to its highest since mid-May alongside the greenback's decline.