Defending the Yen with the 'Euro'...Why Did the US Choose It Instead of the Dollar?

▲ US, Japan, Europe, Euro (EUR), Japanese Yen (JPY)/AI generated image

Europe was caught off guard when the US stepped in to defend the Japanese yen, opting for the euro instead of the dollar.

According to cryptocurrency media outlet BeInCrypto on August 7 (local time), the US Treasury sold euros, not dollars, last week to prop up the yen. The European Central Bank (ECB) was only informed of this fact after the transaction had already concluded. Christine Lagarde and Scott Bessent discussed the matter a day later, but by then, the New York Federal Reserve had already completed the sale on behalf of the US Treasury.

Since World War II, Western central banks have typically relied on mutual consultation, and it has been customary to plan currency interventions together in advance. However, this time, Washington broke this practice, notifying the ECB only after the transaction was completed. The dollar-yen exchange rate fell from approximately 163 yen at the end of July to below 158 yen, stabilizing around 158.40 yen as of August 7.

The choice of the euro was not coincidental but a deliberate decision. Selling dollars could have been interpreted as a retreat from the strong dollar policy championed by Bessent, so the Treasury instead utilized its euro assets. Some analysts argue that the yen carry trade rules no longer apply, increasing the burden to defend the currency in other ways. Bessent later explained the intervention himself. Meanwhile, economists are linking this move to concerns that Japan might sell US Treasury bonds in response.

Senior ECB officials described the incident as a departure from decades of cooperation, with one insider familiar with the discussions calling the situation unprecedented. A US Treasury spokesperson defended the decision, stating, "Decisions regarding the allocation of the Exchange Stabilization Fund are made by the US Treasury based on a comprehensive assessment by the Treasury and the Federal Reserve of market liquidity, valuation, and other relevant factors." However, a senior official from the Trump administration countered these criticisms, saying that Washington respects confidentiality in discussions with foreign counterparts, contrasting this with the ECB's handling of the matter.

This intervention saw the yen move from approximately 164 yen to about 158 yen against the dollar. The Japanese stock market absorbed the shock with relatively moderate losses. Traders are currently pricing in a 44% chance that the Bank of Japan (BOJ) will raise interest rates in September. BOJ Governor Kazuo Ueda has cited increasing inflation risks as a reason for his cautious stance. This incident left European policymakers questioning whether this measure was a one-off and could also foreshadow how a future Trump administration might handle currency defense with allies.

[Key Article Summary]

-The US Treasury sold euros instead of dollars last week to defend the yen, and the ECB was only informed after the transaction ended.

-The dollar-yen exchange rate fell from 163 yen to the 158 yen range, and traders are pricing in a 44% chance of a BOJ interest rate hike in September.

-Senior ECB officials regarded this measure as an unusual event, departing from decades of cooperation.

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