The US Treasury intervened in currency markets by buying yen and selling euros, rather than the traditional method of selling dollars. This action, a joint intervention with Japan to strengthen the yen, reportedly caught European officials by surprise, despite US assurances that the European Central Bank (ECB) was contacted. Analysts from HSBC described this as a "highly unusual — maybe unprecedented — step." The yen strengthened almost 4% last week following the intervention, its biggest weekly jump in two years, and was trading around 157 per dollar.
This unconventional approach is seen by Barclays analysts as a way for the US to avoid signaling a desire for broad-based dollar weakness, keeping the operation a "yen-only affair." The US has approximately €26 billion readily available for such interventions. While the ECB declined to comment on reports of the euro-for-yen sale, a source familiar with the events indicated that the ECB had been in contact with the Federal Reserve.
The choice to sell euros instead of dollars has led to questions and concerns among some economists. Robin Brooks of the Brookings Institution questioned the mechanics, suggesting it "confuses markets and will prove counterproductive." However, a key aspect highlighted by both Tokyo and Washington is the Federal Reserve's FIMA repo facility, which allows foreign central banks to obtain dollar liquidity without selling Treasurys, thus addressing concerns about potential pressure on US funding markets. Japan may have spent as much as $36.58 billion buying yen during Friday's joint intervention.
The US Treasury's move signals a desire to support the yen without forcing Japan to sell large quantities of US Treasurys, which could destabilize global bond markets. The focus now shifts to the longer-term implications of this euro/yen sale. HSBC analysts noted that a euro/yen sale by the ECB would be even more significant, suggesting a broader currency accord among major economies to strengthen the yen.
