The US Treasury recently intervened in currency markets to support the Japanese yen, but in a highly unusual move, it sold euros instead of dollars to purchase yen. This action reportedly blindsided the European Central Bank (ECB), despite prior communication from the US side that the intervention was not a surprise to them. Analysts at HSBC called this an "unprecedented step," and a spokesperson for the ECB declined to comment on the reports.
This unconventional approach raised questions among market participants, especially since coordinated interventions traditionally involve dollar assets. The US Treasury's decision to sell euros rather than dollars is believed to stem from a desire to avoid signaling a broader dollar weakness, keeping the operation focused solely on the yen. This move also reflects Washington's concern about Japan potentially needing to sell large quantities of US Treasuries to finance unilateral intervention, given Japan is the largest foreign holder of US government debt.
The intervention led to a significant strengthening of the yen, which had fallen to a 40-year low against the dollar. The dollar, which was trading at approximately ¥164, dropped to ¥155, and the yen saw its biggest weekly jump in two years, strengthening by almost 4%. The euro also fell, from as high as 187.4 yen to briefly below 180 yen, a more than 4% move. However, analysts at MUFG do not expect a significant long-term impact on the euro due to the relatively limited amount of the currency held by the US for intervention, estimated to be around €26 billion.
Japan's Finance Ministry confirmed its yen-buying intervention and indicated plans to use the Federal Reserve's FIMA repo facility for future interventions. This facility allows foreign central banks to obtain dollar liquidity without directly selling Treasuries. Experts believe this signal is crucial, maximizing the impact of the intervention while addressing concerns that Japanese intervention could destabilize US Treasury markets. The move, however, has led to market confusion, with some analysts questioning its efficacy and long-term consequences for global financial stability.
