US May Have Bought Yen With Euros, Not Dollars, to Preserve Strong-Dollar Policy

The U.S. Treasury may have used euros rather than dollars in coordinated foreign-exchange intervention to support the yen.

Bloomberg reported on August 3 that the Federal Reserve Bank of New York asked major banks for euro-yen quotes on August 1. The Financial Times earlier reported that the New York Fed, acting on behalf of the Treasury, sold euros and bought yen.

Traders say the move may have been intended to avoid undermining confidence in Washington’s strong-dollar policy if the U.S. sold dollars directly.

“The U.S. maintains a strong-dollar policy, so it likely did not want to be seen as trying to weaken its own currency,” said David Forrester, a foreign-exchange strategist at Credit Agricole CIB. Such a move would also clash with the Group of 20 agreement to avoid exchange-rate manipulation for competitive advantage.

The approach differs from past U.S. foreign-exchange interventions, when Washington used dollars directly. The euro is the second-most traded currency in the global foreign-exchange market after the dollar, according to the Bank for International Settlements.

Jason Wong, a foreign-exchange strategist at Bank of New Zealand, said the Treasury probably used euros because selling dollars directly would have been burdensome. The effect was equivalent to selling dollars, but achieved in a more indirect way, he said.

Since July 30, when Japan intervened in the market to defend the yen, the euro has weakened against Group-of-10 currencies. It has fallen about 4% against the yen over the same period.

JPMorgan also said the intervention was aimed at supporting Japan’s defense of the yen rather than driving the dollar lower. The bank said U.S. foreign-exchange reserves, excluding gold and International Monetary Fund special drawing rights, consist mainly of euros and yen. That suggests the move was coordinated intervention carried out within the scope of those reserves.