Strange actions are taking place over in forex markets, with some of the rationale staying behind closed doors. Historically, or at least in recent decades, the U.S. Treasury operated with a strict hands-off doctrine, relying on free markets to determine currency values and only intervening during extreme catastrophes or crises. Yet, the pace at which major interventions are being conducted is now increasing, in moves that can reward allies, punish foreign actors, or protect the U.S. bond market.
Backdrop: Last October, the U.S Treasury executed a $20B swap line with Argentina's central bank as President Javier Milei faced a severe currency run and outsized inflation before key midterm elections. Further economic support was conditioned on Milei winning the vote, and Argentina ultimately repaid the $2.5B initial draw with interest earlier this year. It's also gone the other way, with Treasury Secretary Bessent introducing criteria designed to track off-balance-sheet transactions by major trading partners or disguised commercial transactions that amount to manipulation.
However, the biggest recent intervention by the U.S. occurred this weekend. The American government, along with Japan, conducted an operation aimed at strengthening the yen, which has been flailing for quite a while, but particularly over the past year. In early June, the currency broke through the ¥160 level (USD:JPY), but only kept on weakening from there in a trajectory that alarmed policymakers. Normally, it would be the BOJ that would telegraph its alarm over the cost of imports like oil and inflationary pressures, though this time it was a carefully placed note by Bessent during a cabinet meeting at Camp David. Were euros used in the intervention?
There was not too much color surrounding the intervention, but Japan is the largest foreign creditor of American government debt, holding $1.14T in U.S. Treasuries. As the yen sank past 160 per dollar, Japanese banks and financial institutions likely faced tremendous pressure to sell their Treasuries to cover yen liabilities. That could have had some serious impacts for the U.S., adding pressure to already rising yields, and knock-on effects for mortgage rates and car loans to credit cards and corporate balance sheets. What about the crowded yen carry trade?
2-for-1 deal? "Because we have a good relationship with Japan. We're very strong—very, very strong financially. They are, you know, they have a weakening yen, and they wanted a little bit of help," President Trump declared, appearing to address Japan's cost-of-living crisis and efforts to get currency speculators out of the market. "More than anything else, it was a signal of friendship... It's also good for the world economy." (1 comment) Take the WSB survey here!
