Japan’s earthquakes prompt the Treasury to consider currency intervention.
New York Fed inquiries about the cost of exchanging yen for dollars signaled to traders on Friday that the U.S. government might make a large purchase of the Japanese currency.
The U.S. Treasury took preliminary steps on Friday toward intervening in the currency market after Scott Bessent, the Treasury secretary, expressed concern this week that Japanese market ructions could spill over to the United States.
According to two people who are familiar with the situation, the unusual move of asking banks about the cost of exchanging yen for dollars by the Federal Reserve Bank of New York on behalf of the Treasury Department prompted a sharp recovery in the value of the Japanese yen.
Currency values help determine bond yields, and this week, Bessent attributed the rise in borrowing costs for the US government to an increase in the yields on Japanese bonds. The Trump administration has been focused on lowering yields on U.S. Treasuries, which support consumer and corporate debt borrowing costs. Lowering borrowing costs is part of the administration’s recent push to improve affordability for Americans.
The New York Fed’s inquiries about the exchange rates on Friday were signals to traders that the Treasury may make a large-scale purchase of yen. Though the Treasury did not ultimately intervene, the possibility that it may at some point buy large amounts of yen drove up the currency’s value 1.6 percent against the dollar, its sharpest gain in almost six months.
Since April, the yen had steadily weakened 13 percent, with a similarly timed rise in Japan’s borrowing costs accelerating this week as investors called into question the country’s fiscal discipline.
Analysts and investors have questioned Prime Minister Sanae Takaichi’s costly pledge to cut sales taxes and call for an immediate election. At its most recent meeting, the Bank of Japan flagged the weakening yen as a risk to the economy.
But some analysts were still left slightly puzzled by the Treasury Department’s move, as recent interventions to stabilize the yen have come from the Bank of Japan. The U.S. Treasury rarely intervenes in currency markets.
“It’s very unusual for the United States. Ed Al-Hussainy, an interest rate strategist at Columbia Threadneedle Investments, stated that the Treasury should intervene, adding that the situation was “odd at this stage.” The Treasury Department and the White House did not respond to requests for comment.
Mr. Al-Hussainy said that it wasn’t obvious at the time that the United States was being affected by Japan’s much smaller market for government bonds. “The fear that Japanese interest rate movements are going to spill over into Treasuries is pretty unfounded,” he said.
Although such government interventions are uncommon, Mr. Bessent has taken a more interventionist approach to currency policy as Treasury secretary.
When Argentina’s economy was teetering last year, Mr. Bessent orchestrated a central bank currency swap and used a bucket of money that the Treasury Department controls, known as the Exchange Stabilization Fund, to buy pesos. This month, he stated that the United States had been reimbursed and that the maneuver had benefited taxpayers.
A former hedge fund manager, by placing large currency wagers, Bessent established himself as a household name in the financial industry. In the 1990s, as a major investor for the philanthropist George Soros. With a $10 billion wager that the British pound was overvalued, Bessent caused a stir. That wager helped “break” the Bank of England with devastating trades against the pound. In 2013, Mr. Bessent netted $1 billion for Mr. With a significant wager against the yen, Soros’ fund.
