The United States Treasury undertook a rare intervention in the foreign exchange market to support the Japanese yen, selling euros from its reserves to purchase yen. This action pushed the dollar down from ¥164 to ¥155 against the yen in the short term. While the US maintains that the European Central Bank (ECB) was informed and that the euro sale was merely a reallocation of reserves, reports indicate some European officials were blindsided by the specific method of intervention, particularly the sale of euros instead of dollars.
The intervention was a coordinated effort with Japan, aiming to halt the yen's prolonged slide, which had reached its weakest level against the dollar in 40 years. US Treasury Secretary Scott Bessent stated that the US joined the effort due to concerns that a continued weak yen could fuel inflation in Japan, put pressure on other Asian currencies, and destabilize global markets. Bessent emphasized that while the intervention could curb short-term volatility, sustained recovery of the yen would require complementary Japanese policies.
The decision by the US to sell euros rather than dollars for the intervention raised questions among market analysts and economists. Traditionally, coordinated interventions involving the US are funded with dollar assets. The move was partly motivated by a desire to avoid Japan needing to sell large quantities of US Treasuries, which could destabilize US funding markets, as Japan is the largest foreign holder of US government debt. The US also highlighted Japan's access to the Federal Reserve's FIMA repo facility as a way for Japan to obtain dollar liquidity without direct Treasury sales.
Some analysts, like Robin Brooks of the Brookings Institution, questioned the effectiveness and mechanics of the US selling euros, suggesting it could confuse markets and be counterproductive. However, others, like Katie Martin, an FT markets columnist, noted that the US already held a significant portion of its exchange rate stabilization funds in euros and yen, making the euro sale a utilization of existing assets rather than a statement about the euro's value.
Despite the unusual nature of a country intervening to support another country's currency, the US has indicated its readiness to intervene again if necessary. This coordinated action, the first between the US and Japan to buy yen since 1998, and the first coordinated intervention involving both countries since 2011, highlights Washington's concern over the yen's weakness and its potential broader economic impacts.
