ROI-Making sense of the Trump Treasury’s odd FX intervention: McGeever

The US Treasury intervened in the foreign exchange market for the first time since 2011, buying Japanese yen to prop up the currency, which had weakened to a 40-year low.

The U.S. Treasury's foray into the foreign exchange market on Friday ​to buy Japanese yen wasn't its first FX intervention and won't be its last. But it was one of ​its most unusual. On Sunday, President Donald Trump's administration acknowledged it had intervened alongside ‌Japan ​on Friday to prop up the flailing yen, which had weakened to a 40-year low of almost 164 against the dollar. This was Washington's first intervention in the FX market since 2011, when, together with G7 partners, it sold yen to stop the Japanese currency from strengthening too much. Friday marked the U.S. Treasury's first yen-buying intervention since 1998, and its first FX intervention with ‌just one other country, as opposed to action in coordination with multiple central banks, during that period. But even if Washington’s aims were conventional - correcting what it deems to be excessive volatility and a fundamental exchange rate misalignment - the methods were anything but. First off, the Treasury gave currency traders at several banks a heads-up that it might intervene in a certain currency during a specific time frame. This removes the element of surprise, which is a powerful weapon in FX intervention. Treasury also funded these yen purchases via a third currency, in ‌this case euros, rather than U.S. dollars. Again, that's an unusual move. If that weren't enough, there was the bizarre sideshow of Treasury Secretary Scott Bessent's yen purchase "to do" list. During the on-the-record portion of Trump's cabinet meeting on Friday at Camp ‌David, a Reuters photographer snapped an image of Bessent's notepad that said "To Do" followed by "Buy Japanese Yen (JPY) $5-10 bil." Did Bessent jot this down, including the yen's FX trading code 'JPY' and specific amount, in case he forgot? Moreover, a kitty of 5-10 billion euros or dollars is tiny - Japan is estimated to have spent over $36 billion in Friday's joint intervention. It may have sold nearly $60 billion buying yen on July 30, and over $70 billion earlier this year.

Bessent is a former hedge fund manager who spent decades trading currencies. He helped billionaire George Soros "break" the Bank of England by successfully betting against sterling in 1992. It's highly unlikely ⁠that he would ​need a Post-it note to remind him to take such a rare ⁠and consequential policy step. But Bessent is doing things differently from his predecessors - witness the Treasury's direct purchase of Argentine pesos last year. Perhaps this latest "photo op" was just another unorthodox tactic? Steven Englander, head of G10 FX strategy at Standard Chartered, says it's hard to figure out the Treasury's motivation for getting involved now, ⁠especially after the Bank of Japan refrained from raising interest rates earlier on Friday. It's not as if the yen, although extremely weak, is the U.S.'s most pressing trade issue.

“It’s a puzzler,” Englander says. "And if you want to intervene you don’t need the choreography.” HEAD-SCRATCHER

So why did they do ​it? This FX exercise could be the latest tactic in the White House's long-stated goal of weakening the dollar to help reduce the chronic U.S. trade deficit, making America more competitive again. The dollar has fallen as much as ⁠5% against the yen since Friday's intervention. And in his social media post on Sunday, Bessent noted the yen's "substantial undervaluation". If weakening the dollar was a key aim, however, one might ask why the Treasury chose to use euros to fund these purchases instead of dollars. Here, the bond market may have figured in Bessent's thinking as ⁠much ​as the FX market. Long-dated U.S. Treasury yields are currently the highest since 2007, which is driving up U.S. mortgage rates, and the benchmark 10-year Treasury yield is climbing too. Bessent has previously underscored the importance of not allowing bond yields to rise too high. The optics of the U.S. selling even small quantities of dollar-denominated assets to support a foreign currency might have been unwelcome. Japan is the world's largest single holder of U.S. bonds. Using the U.S. Federal Reserve's "FIMA" repurchase agreement facility for FX intervention relieves ⁠pressure on Tokyo to sell Treasuries as well. In that light, it's worth noting that Japan's Treasuries holdings fell by nearly $67 billion in May to $1.14 trillion. That was the biggest monthly decline since September 2022 and the third biggest on ⁠record. Extreme weakness in the yen and U.S. bond markets is a dangerous ⁠cocktail, which could spill over into global assets and potentially require an even bigger response from authorities. One can see why Washington is keen to mitigate that risk, no matter how unconventional its methods.

(The opinions expressed here are those of the author, a columnist for Reuters) Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. Follow ROI on LinkedIn, ‌and X. And listen to the Morning ‌Bid daily podcast on Apple, Spotify, or the Reuters app. Subscribe to hear Reuters journalists discuss the biggest news in markets and ​finance seven days a week. (By Jamie McGeever; Editing by Marguerita Choy)