Washington acts to shield US bond markets as Japan's yen weakness threatens Treasury holdings
The United States sold euros to buy Japanese yen last Friday, funding a coordinated intervention with Tokyo to prop up the sliding currency and reaching for a mechanism that unsettled global markets.
The Federal Reserve Bank of New York executed the euro sale on behalf of the US Treasury, working through Goldman Sachs and Morgan Stanley, according to the Financial Times, which cited three people familiar with the operation.
Coordinated interventions have traditionally been funded with dollars, and analysts at HSBC called the euro-selling route "a highly unusual — maybe unprecedented — step," as reported by Reuters.
It marked the first time Washington had bought yen to strengthen the currency since 1998, per the FT; a 2011 coordinated action, by contrast, had aimed to weaken it after Japan's earthquake and tsunami.
Japan confirmed the joint operation on Monday, and central bank data cited by Reuters indicated Tokyo may have spent as much as US$36.58bn buying yen on Friday.
The euro amount was not disclosed.
The action followed a solo intervention by Tokyo a day earlier that the FT estimated at roughly ¥8.45tn (US$52.8bn).
For advisors, the choice to sell euros rather than dollars is the tell.
Barclays wrote that the currency selection "avoids signaling a desire for broad-based dollar weakness," keeping the effort a yen-only affair, according to Reuters.
A softer dollar would complicate US efforts to rein in above-target inflation and could hand a divided Federal Reserve fresh cause to raise rates, currency strategists told Reuters.
US Treasury Secretary Scott Bessent said he had assured European officials the sale was "just a reallocation of our resources," and a source told Reuters the European Central Bank had been in contact with the Fed over the matter.
Not everyone bought the logic.
Robin Brooks of the Brookings Institution told CNBC the euro-for-yen structure was "confusing markets and will prove counterproductive," questioning why Washington had not simply funded the purchases with dollars.
The stakes for US markets help explain the intervention.
Japan holds more than US$1.1tn in US Treasuries, the largest foreign position, and repeated solo intervention had raised the prospect that Tokyo might sell some of that stack to fund yen buying, the New York Times reported.
Such sales could depress Treasury prices and lift US borrowing costs at a moment when the yield on 30-year US bonds recently touched its highest level since 2007.
As Oxford Economics' Louise Loo put it to CNBC, "there is a self-preservation element here."
To ease that risk, both governments pointed to the Fed's Foreign and International Monetary Authorities (FIMA) repo facility, a pandemic-era backstop that lets foreign central banks raise dollars without selling Treasuries outright.
Japan's finance ministry said Monday it plans to use the FIMA facility for future interventions.
Bessent said on Tuesday the Fed should consider enlarging the tool, which would allow the Bank of Japan (BOJ) to borrow up to US$60bn, Reuters reported.
The yen has clawed back from four-decade lows.
It had weakened to near ¥164 to the US dollar in late July before strengthening almost 4 percent last week, its biggest weekly jump in two years, according to Reuters.
After the announcement it surged more than 1 percent on Monday to ¥155.20, its strongest since early May, then eased to about ¥157.55 by Tuesday.
Bessent told CNBC on Tuesday the US would "do whatever it takes to support them in a way that helps the American economy, the American taxpayer," and both governments said they would not hesitate to act again.
US President Donald Trump, speaking to reporters aboard Air Force One on Sunday, framed the move as a gesture of support, saying the US was "always there for Japan," CNN reported.
Analysts warned the boost may not last without a policy shift.
Mark Sobel, a former Treasury official now at the OMFIF think tank, told Reuters that "if Japan wants a higher yen, it needs to address the monetary and fiscal policy concerns," citing the country's heavy debt load and accommodative stance.
Bessent made a parallel point on CNBC: "You can give market signals with intervention, but it's policy that turns it."
That put the focus on the BOJ, which held its policy rate at 1 percent last week while signalling room for a hike as soon as September.
Derivatives markets put the odds of a quarter-point September increase at roughly 40 percent, up from 30 percent a week earlier, according to the Financial Times.
Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities, told Reuters, "I feel like a September rate hike is a done deal."
The operation surfaced publicly in part through a Reuters photograph taken over Bessent's shoulder at a Camp David cabinet meeting on Friday, showing a notepad reading "Buy Japanese Yen (JPY) $5-10 bil."
Bessent later downplayed the image, telling CNBC he had wanted "all the reporters looking on over my shoulder" to learn the yen's currency symbol.
