6 hours ago
13
The US Treasury did something on August 1 that it hasn’t done in a very long time: it stepped into the foreign exchange market alongside Japan and actively intervened to prop up the yen. The twist that caught everyone off guard was the chosen weapon. Rather than selling dollars, the New York Federal Reserve sold euros to buy yen, a move designed to shore up Japan’s battered currency without sending any signal that Washington had lost faith in its own.
The USD/JPY rate dropped from roughly 163 to below 158 in the aftermath.
Why euros, and why now
The yen had been trading at near 40-year lows against the dollar heading into August. Japan’s currency has been under relentless pressure, largely because the Bank of Japan has kept interest rates far below those of its peers while the Federal Reserve has maintained a comparatively tight monetary stance.
Japan had already been fighting the slide on its own. Tokyo’s prior yen-buying operations reportedly totaled as much as ¥11.7 trillion, roughly $36.58 billion.
The US contribution was estimated between $5 billion and $10 billion. When the world’s reserve currency issuer shows up on the same side of a trade as Japan, speculators tend to pause and reconsider.
The decision to sell euros rather than dollars was the real strategic tell. Selling dollars would have undermined Treasury Secretary Scott Bessent’s publicly stated preference for a strong dollar. It also would have risked encouraging Japan to accelerate sales of US Treasuries. Euros offered a workaround: stabilize the yen, keep the dollar narrative intact, and quietly discourage Tokyo from dumping American debt.
Europe didn’t get the memo
The European Central Bank was informed of the euro sales only after they had already been executed. European officials did not take the surprise well.
The lack of prior notice was described as “very striking” and “sad” by European officials. Selling billions in euros puts downward pressure on the currency, which can complicate the central bank’s own monetary policy calculations. If the euro weakens, imported goods become more expensive, which feeds into inflation.
The last time this happened
The last coordinated US foreign exchange intervention occurred in 1998, when the Treasury bought yen during the Asian financial crisis. Before that, coordinated G7 currency operations were a semi-regular feature of global finance in the 1980s and early 1990s.
What this means for markets
In the short term, the intervention achieved its goal. Yen volatility compressed, and the currency stabilized below the levels that had been causing alarm in Tokyo.
For bond markets, the implicit message may matter most. By selling euros instead of dollars, the US effectively told Japan: we’ll help you stabilize your currency, but don’t do it by dumping our debt. Japan is the largest foreign holder of US Treasuries, and any significant selling program from Tokyo would push US yields higher, increasing borrowing costs across the American economy.
Disclosure: This article was edited by Editorial Team. For more information on how we create and review content, see our Editorial Policy.
English (US) ·