Dollar rebounds from losses sparked by Treasury buyback plan

* Dollar selloff reflected deficit and inflation fears, feeding a gold-and-bitcoin debasement trade

* Fiscal and Fed credibility strains may shift pressure from bonds to the dollar

* Fed minutes showed several officials favored hiking, with markets pricing 67% odds by December (Updated in New York afternoon time)

NEW YORK, Aug 20 (Reuters) – The U.S. dollar rebounded from earlier losses to post a modest gain on Thursday as traders evaluated whether U.S. Treasury Department efforts to hold down longer-term Treasury yields will be successful. The Treasury said on Wednesday it would double the size of its buybacks of 10- to 30-year debt to at least $4 billion per operation, in an attempt to steady a market that had been rattled by concerns over the growing U.S. fiscal deficit.

The announcement triggered a sharp selloff in the U.S. currency as traders worried that, instead of long-term yields rising to reflect the fiscal picture, the pressure from pricing in a larger deficit would show up as a weaker dollar. That dynamic, which some in the market call the “debasement trade,” has also boosted gold and bitcoin as alternative stores of value. But markets pushed back against the Treasury’s latest move on Thursday, with yields renewing their climb, said Sarah Ying, head of FX strategy at CIBC Capital Markets. “This is (Treasury Secretary Scott) Bessent testing the market and the market fighting back,” Ying said. “It could very well be that we get a little bit more of these announcements in the future, but it doesn’t seem like they are very credible to the market, at least as of right now.” Bessent said on Thursday he may again increase the volume of Treasury bonds the government will repurchase, adding that “yields don’t reflect the underlying fundamentals.” The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, rose 0.06% to 98.89, with the euro down 0.01% at $1.1676. The single currency had earlier reached $1.171, the highest since May 14. The Japanese yen weakened 0.6% against the greenback to 159.12 per dollar. This was the second time in weeks that Bessent has stepped in to try to counteract market moves, having joined Japan in a July 31 currency market intervention aimed at reversing the yen’s slide to 40-year lows against the dollar.

The timing of Wednesday’s buyback announcement caught many investors off guard, coming soon after the Treasury’s quarterly refunding statement earlier in August and ahead of a 20-year bond auction.

“It looked odd from a timing point of view at least,” said Shaun Osborne, chief FX strategist at Scotiabank. “Markets are concluding correctly that if the Treasury doesn’t want the bond markets to take the strain from these concerns about fiscal policy sustainability and Fed policy credibility, then the dollar will have to.”

Traders are also focused on an upcoming speech from Federal Reserve Chairman Kevin Warsh at the central bank’s Jackson Hole symposium later this month for clues on how he plans to tackle still-elevated inflation.

Warsh, who took over the Fed in May, unsettled markets after the central bank’s July meeting by offering few clues on how policymakers might respond to persistent price pressures.

“Investors are going to want maybe a bit more from Warsh than a sort of very high-level kind of opaque repeat of the July FOMC press conference, where he talked a lot without really saying very much,” Osborne said. Minutes from the Fed’s July meeting, released on Wednesday, showed that concern about inflation deepened last month, with “several” policymakers ready to raise interest rates and “many” saying a hike in borrowing costs would be needed if inflation does not decline toward the central bank’s 2% target.

Markets now price in a 35% chance of a September rate hike, rising to 67% for December.

Sterling strengthened 0.18% to $1.3629 and had reached $1.3659, the highest since February 16.

In cryptocurrencies, bitcoin gained 5% to $72,524.54, the highest since June 1. (Reporting by Karen Brettell, Samuel Indyk and Ankur Banerjee; Editing by Stephen Coates, Shri Navaratnam, Gareth Jones, Philippa Fletcher)