Investing.com -- The U.S. Treasury's surprise move to at least double the maximum size of its long-end buyback operations to $4 billion per operation amounts to "soft-form financial repression" and is "very similar to the Fed’s operation twist", Deutsche Bank warned Wednesday, adding that the dollar faces further downside as a result.

George Saravelos, Deutsche Bank's head of FX research, published an immediate-reaction note after the Treasury announced it was raising the per-operation cap on liquidity support buybacks covering the 10-year to 20-year and 20-year to 30-year nominal coupon sectors from $2 billion to at least $4 billion. The dollar weakened sharply in the minutes following the announcement, a move Saravelos flagged in real time: "In an unexpected announcement, the US Treasury a few minutes ago announced a big increase in buybacks of long-end US Treasuries. The dollar is weakening unusually sharply."

Saravelos frames the buyback as structurally equivalent to the Federal Reserve's once-famous operation twist. "The buyback operation is effectively very similar to the Fed's operation twist," he wrote. "Treasury would have to issue more treasury bills to finance the removal of duration from the market. To the extent that this eases financial conditions, it would arguably necessitate an offsetting tightening from the Federal Reserve." The implication is that Treasury is, in effect, taking over a form of yield-curve management that has historically been the province of the central bank.

Deutsche Bank ties the buyback to a broader pattern it sees emerging from Washington. Saravelos describes both the buyback announcement and earlier U.S. discouragement of Japanese yen intervention as "signs of increasing administration unease on the ongoing rise in long-end US yields." Together, he argues, these moves reflect a policy impulse Deutsche Bank first outlined in what it called its "Pennsylvania plan" — a framework the bank published last year examining the potential need for financial repression in the U.S. Treasury market.

"We see both the buyback and encouragement to use the FIMA facility for FX reserves as soft-form financial repression policies aimed at containing the long-end of the US yield curve," Saravelos wrote.

The transmission mechanism to the dollar is direct, in Deutsche Bank's view. If policymakers prevent long-dated Treasury prices from falling freely, foreign holders of U.S. debt cannot receive their market-clearing adjustment through price. Instead, the adjustment comes through the currency. As Saravelos puts it: "If the market price of USTs is not 'allowed' to adjust down, the foreign exchange price of UST owned by foreign investors has to adjust via a weakening in the dollar."

A key wildcard in the bank's framework is how Fed Chair Kevin Warsh responds. Deutsche Bank argues that if the buyback genuinely eases financial conditions, the Fed should, in principle, offset that easing with tighter monetary policy. But if Warsh fails to acknowledge the buyback as a loosening factor, Deutsche Bank says that silence itself becomes a negative signal for the dollar. "If Chair Warsh does not recognize the buyback as a factor driving an easing of financial conditions, we would take it as an additional dollar negative driver," Saravelos wrote.

Saravelos closes with a warning that the risk is not limited to Wednesday's announcement alone. "In all, the market is likely to be increasingly attentive to further measures intended to support the US Treasury market going forward. The more these are perceived as distortionary to market pricing, the more the dollar is likely to weaken."

For currency markets, the near-term focus will fall on any public response from Warsh or the Fed regarding the financial-conditions implications of the expanded buyback program. Any signal that the Fed is watching the Treasury's yield-curve management efforts, or alternatively any silence that Deutsche Bank interprets as complicity, could sharpen the dollar's move. Saravelos's framework suggests the dollar bears the adjustment burden as long as long-end Treasury yields are perceived as administratively capped rather than market-determined.