The U.S. dollar fell sharply against the Japanese yen on Monday after U.S. President Donald Trump and Japan’s finance ministry confirmed that both countries had intervened in the currency market.

The dollar had been trading above 163 yen, reaching levels not seen in about 40 years, before beginning to slide below 160 yen over the weekend amid growing speculation that authorities were stepping in. After the intervention was announced early Monday, the greenback dropped to around 155.20 yen before recovering to 156.75 yen later in the day in Tokyo. Even after the rebound, it remained well below last week’s high. The move echoes earlier rounds of unilateral yen buying by Tokyo in 2022 and 2024, when Japan spent tens of billions of dollars from its reserves to slow the currency’s slide — though those solo efforts produced only temporary relief as the interest-rate gap persisted.

Japan has been trying to curb the yen’s weakness, which has pushed up import costs and added to domestic inflation pressures. The weaker currency has also drawn bargain hunters to Japan, but it has increased the cost of goods imported into the country. Japan relies heavily on imports, and higher oil prices have intensified the strain, leaving Prime Minister Sanae Takaichi’s government under growing pressure to ease the cost-of-living burden.

The intervention came as the wide gap between U.S. and Japanese interest rates continued to weigh on the yen. Investors have been selling the Japanese currency and buying dollars to capture higher returns from U.S. assets, a dynamic reinforced by yen-funded carry trades in which borrowers exploit Japan’s low borrowing costs to invest in higher-yielding currencies. That gap remained in place after both the Bank of Japan and the Federal Reserve left rates unchanged at their meetings last week.

Neil Newman, managing director and head of strategy at Astris Advisory Japan, said it is unusual for governments to openly confirm this kind of action. He pointed to the coordinated response after Japan’s devastating 2011 earthquake and tsunami as the last major example.

Asked on Sunday why the U.S. had helped, Trump said: “We have a good relationship with Japan. We’re very strong — very, very strong financially — and they are, you know, they have a weakening yen, and they wanted a little bit of help, and we’re always there for Japan. Japan’s been very good to us, with the exception, of course, of Pearl Harbor.” Trump also said the U.S. received a “financial benefit” from the deal and described it as a “signal of friendship.” “It’s also good for the world economy,” he said.

A softer dollar makes American goods cheaper for Japanese buyers, which can improve the competitiveness of U.S. exports in Japan. Newman said that creates an economic rationale for Washington’s support. “It’s very rare that the Americans will work with the Japanese on this, but there is an alignment of interests here basically between Japan and America,” he said.

Louise Loo, head of Asia economics at Oxford Economics, said inflation pressure in Japan was “possibly one of the key reasons” Washington agreed to take part. She added that the U.S. also had its own interests to protect. “There is a self-preservation element here. Volatile markets driven by potentially fiscally-aggressive policies from Japan could extend to the U.S. Treasury markets, destabilizing the dollar,” she said.

Loo said the attention on the Federal Reserve’s standing FIMA repo facility suggested that both sides wanted to avoid forced Treasury sales. The facility, established in March 2020 at the height of the Covid-19 market turmoil, allows foreign central banks to obtain dollar liquidity without selling U.S. government bonds outright. Japan’s finance ministry said Monday that it plans to use the FIMA facility in future interventions.

Masahiko Loo, senior macro strategist at State Street, said that message “may be bigger than the intervention itself.” He said Washington’s concerns may extend beyond the yen, because further depreciation could encourage sales of Japanese bonds, push up interest rates and add volatility to global bond markets. That risk is especially relevant as both Japan and the U.S. are dealing with elevated long-term borrowing costs.

“Highlighting access to the Fed’s FIMA repo tells markets Japan can raise dollar liquidity without selling Treasuries … addressing concerns that MOF intervention could pressure U.S. funding markets through short-end UST sales,” Masahiko said. “It’s an attempt to maximize the signaling effect and get the biggest bang for the buck with the tools already available.”

The dollar’s decline followed a volatile period for the yen, which had already briefly strengthened as traders began to suspect official intervention once the currency moved below 160 per dollar. Currency prices are usually driven by trading activity, but interest rates, policy decisions and investor demand can all move them sharply.

On Monday, the broader economic backdrop also included signs of stronger U.S. manufacturing activity. The Institute for Supply Management’s manufacturing index rose to 55.6 in July, its strongest reading since May 2022 and the highest in more than four years. Economists had expected 54.0. Any reading above 50 indicates expansion.

Factories reported more overseas orders, larger backlogs and higher output. The production measure jumped 6.3 points, while employment rose for the first time in 33 months to its best level since August 2022. The prices measure eased slightly to 71.1, meaning close to three out of every four surveyed companies were still paying more for supplies. July marked the 22nd straight month in which most respondents reported rising prices.

Purchasing managers said the business environment remains difficult to plan around, with tariff changes and the conflict involving Iran forcing repeated adjustments to orders and supply decisions. Some executives said the uncertainty now feels worse than it did during the Covid pandemic.

After the data, Goldman Sachs raised its estimate for annualized U.S. growth in the third quarter to 2.4%, up from its earlier 1.5% projection for the second quarter. Traders, however, were not convinced the stronger factory data guaranteed another rate increase. Futures pricing from CME Group’s FedWatch tool put the chance of a rate hike at the Sept. 15-16 FOMC meeting at 64.5% on Monday, slightly below Friday’s level.

At the same time, markets were also watching Trump’s comments on Iran. The U.S. president said talks with Tehran were due to begin on Monday after he paused another round of military action against the country. Speaking aboard Air Force One on Sunday, Trump said the discussions would begin the following afternoon, though he did not say where they would take place or who would attend.

Trump said Saudi Arabia, the United Arab Emirates, Qatar and Iran had all asked Washington not to carry out the strikes. He also said an agreement involving the Strait of Hormuz and Iran’s nuclear program was “imminent.” Iran offered a different account. Iranian Foreign Ministry spokesperson Esmail Baghaei said Monday that Tehran had no immediate plan for direct talks with the U.S. and was only speaking with Oman about the Strait of Hormuz.

Trump said on Saturday that the canceled military operation would have been the largest since World War II, while also making clear that the U.S. remained prepared to attack Iran.

The Strait of Hormuz carried roughly one-fifth of the world’s oil supply before the war. Shipping through the route has since fallen sharply, though vessel traffic has briefly increased whenever headlines pointed to possible progress. Oil prices fell on the latest diplomatic signals, with West Texas Intermediate crude for September delivery down almost 6% at $79.66 a barrel and Brent crude for October delivery down 5.16% at $83.39 a barrel.

The U.S. 10-year Treasury yield has risen by nearly 57 basis points since the start of the year, adding pressure to global bond markets.

Trump said the yen intervention reflected a broader economic alignment between Washington and Tokyo. “We have a good relationship with Japan,” he said. “They wanted a little bit of help, and we’re always there for Japan.”