The U.S. Treasury recently intervened in currency markets by selling euros to buy yen, an "unusual — maybe unprecedented — step" according to HSBC analysts. This move is interpreted as an effort to help Japan strengthen its currency without signaling a broader desire for a weaker U.S. dollar, which would complicate efforts to control inflation. Barclays analysts noted that this approach keeps the operation a "yen-only affair." The action also likely reflects U.S. concerns about Japan, the largest foreign holder of U.S. government debt, potentially needing to sell large quantities of Treasuries to finance unilateral intervention, which could destabilize U.S. funding markets.
Japan confirmed its own yen-buying intervention on Monday. The U.S. Treasury's decision to use euros instead of dollars has been called "weird" and "unwise" by some economists like Edwin Truman, a former assistant secretary at the Treasury, and Robin Brooks of the Brookings Institution, who argued it undercuts the efficacy of U.S. participation and could confuse markets. Brooks also questioned the mechanics of the operation, suggesting it could be counterproductive. The amount of U.S. intervention is unknown, but a photo of Treasury Secretary Scott Bessent's notepad suggested a range of $5 billion to $10 billion.
A key aspect of this intervention involves the Federal Reserve's FIMA repo facility, which allows foreign central banks to obtain dollar liquidity without selling Treasuries. Japan's Finance Ministry announced plans to use this facility for future interventions, a signal that State Street's Masahiko Loo called potentially "bigger than the intervention itself." Louise Loo of Oxford Economics suggested avoiding a scenario where Japan dumps Treasuries was a primary reason for U.S. involvement, noting a "self-preservation element" for the U.S. given the potential for volatile markets driven by Japanese fiscal policies to extend to U.S. Treasury markets. MUFG's Lee Hardman highlighted that a weaker dollar is not ideal for the U.S. at a time of above-target inflation.
