By Karen Brettell
NEW YORK, Aug 20 (Reuters) - The U.S. dollar fell to a three-month low against the euro on Thursday before paring losses after the Treasury Department moved to calm a bond market selloff that had pushed long-end yields to their highest level since 2007.
The Treasury said Wednesday it would double the size of its buybacks of 10- to 30-year debt to at least $4 billion per operation, 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 about a worsening fiscal picture and potentially higher inflation, boosting gold and bitcoin in what some call the "debasement trade."
The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, was last down 0.01% at 98.82, with the euro up 0.01% at $1.1678. The single currency earlier reached $1.171, the highest since May 14.
The Japanese yen weakened 0.38% to 158.75 per dollar.
Markets pushed back against the Treasury's move on Thursday, with yields renewing their climb higher, 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."
It 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 recent 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."
FED FOCUS
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, you know, 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 Wednesday, showed 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 68% by December.
Sterling strengthened 0.23% to $1.3634 and reached $1.3659, the highest since February 16.
In cryptocurrencies, bitcoin gained 3.47% to $71,465.81, the highest since June 1.
(Reporting by Karen Brettell, Samuel Indyk and Ankur Banerjee; Editing by Stephen Coates, Shri Navaratnam, Gareth Jones, Philippa Fletcher)
