Joint U.S.-Japan Currency Intervention Using Euros Signals Weakening Dollar Dominance

By Mike Maharrey

The United States recently intervened in currency markets to support the Japanese yen, but the unconventional manner in which the operation was conducted has drawn attention to the eroding reserve status of the U.S. dollar. Joint U.S.-Japan currency intervention is itself a rare event — before a similar episode in 2022, the two countries had not coordinated such an operation in over two decades.

An Unusual Approach

When the U.S. typically intervenes in currency markets, it purchases a foreign currency using dollars. The resulting surge in demand strengthens the target currency relative to others, while the dollar sale simultaneously weakens the U.S. currency.

Last week's intervention departed from this standard playbook. Instead of buying yen with dollars, the Treasury Department purchased yen using euros, thereby preserving dollar strength.

On the surface, the move suggested the U.S. was willing to assist Japan while being careful not to undermine the dollar. However, according to the Financial Times, the operation "blindsided" the European Central Bank — U.S. officials did not inform the ECB until after the transaction was completed.

A Deeper Concern

In an op-ed published by the Financial Times, U.C. Berkeley economics professor Barry Eichengreen argued that the Treasury's execution of the intervention reveals a deeper concern about the U.S. bond market.

"The message is that U.S. Treasury Secretary Scott Bessent & Co worried that selling dollar securities to prop up the yen would put additional strain on the long end of the US Treasury market."

Sagging demand for U.S. Treasuries is an escalating problem for American policymakers. As bond demand falls, prices decline and yields rise correspondingly, driving up the federal government's borrowing costs. With the U.S. already spending over $1 trillion annually on interest expense, policymakers face pressure to sustain Treasury demand.

Eichengreen suggested that selling euros rather than dollars was likely partly a function of "that's what the Treasury had on hand" in the currency stabilization fund, but added there was almost certainly more to the operation.

"It is also a way of not asking the market to swallow additional Treasuries sold to reduce dollar exposure, which would have aggravated an already delicate situation."

The Mechanics of Currency Intervention

When a country seeks to strengthen its currency, it typically sells a foreign currency — often dollars — and uses the proceeds to buy its own currency. Japan followed this pattern, selling dollars to purchase yen.

Japan's yen has been under sustained pressure as the Bank of Japan maintained ultra-loose monetary policy even as the Federal Reserve raised rates aggressively, creating a wide interest-rate differential that drove capital out of yen and into higher-yielding dollar assets.

If Japanese authorities lack sufficient dollars on hand, they can sell dollar-denominated assets, such as U.S. Treasuries, to raise dollars, then use those dollars to buy yen. Japan is the largest foreign holder of U.S. Treasuries, with holdings exceeding $1 trillion, meaning any significant liquidation could reverberate through the U.S. bond market. This transaction creates a problematic feedback loop:

1. The yen weakens.
2. Japan intervenes to defend its currency.
3. Japan needs dollars and sells some U.S. Treasury holdings to raise them.
4. Treasury prices fall as supply increases.
5. Long-term yields rise, given the inverse correlation with bond prices.
6. Higher U.S. yields attract investors to dollar assets.
7. The dollar recovers, but the yen weakens again.

Japan has been engaging in market intervention for several months. The country's foreign currency reserves fell by $75.6 billion in May. According to Bloomberg, this broadly matched the scale of yen intervention conducted that month. Federal Reserve custody data confirmed a decline in Japanese Treasury holdings consistent with this liquidation.

U.S. Motivations

Treasury Secretary Bessent reportedly did not want Japan to sell Treasuries, so the U.S. offered to step in. By purchasing yen directly, the U.S. achieved two objectives simultaneously: the yen received a boost without increasing the supply of Treasuries in the open market, and upward pressure on yields was avoided. In effect, U.S. intervention reduced the amount of dollars Japan would need to raise by liquidating Treasury holdings.

While the U.S. has a vested interest in maintaining stable currency markets and intervention is typically reserved for periods of "excess volatility," the operation appeared motivated by more than solidarity with an ally. The U.S. was also trying to contain a deteriorating Treasury market at a time when the government needs to borrow increasingly to sustain its spending.

The FIMA Repo Facility

In a further signal of cooperation, Japanese officials indicated they will use the Foreign and International Monetary Authorities (FIMA) facility for future currency support operations.

The Federal Reserve created FIMA in March 2020, during the early days of the pandemic, when foreign institutions needed dollars and began selling Treasuries to raise cash, causing severe volatility and dysfunction in the Treasury market. The facility allows foreign monetary authorities to obtain dollars without selling Treasuries outright. Instead, the Fed loans dollars to the foreign government, which pledges Treasuries as collateral. FIMA loans are short-term — a maximum of seven days — but can be rolled over.

Eichengreen said both the U.S. intervention and Japan's willingness to use FIMA indicate that "the dollar's status as a reserve currency is not what it used to be."

"Central banks are accustomed to holding foreign reserves in dollars because markets in U.S. Treasury securities are liquid. Central banks hold U.S. Treasuries because they can be freely bought and sold and used in interventions. But not now, at least not in unlimited quantities. Instead, we see the U.S. Treasury stepping in with euro sales as part of its contribution to the intervention, thus limiting the volume of dollar sales needed by the Japanese authorities."

Eichengreen concluded that the U.S. is reluctant to see foreign central banks deploy dollar reserves due to the potential ramifications for American financial markets.

"This is telling us that the dollar is not the attractive reserve currency it once was. When this message sinks in, other countries will redouble their search for more attractive, readily usable alternatives. Reserve diversification is apt to gather steam."

That trend is already visible in the broader geopolitical landscape, where countries including China, Russia, and members of the BRICS bloc have expanded bilateral trade settlements in local currencies and explored alternative payments infrastructure designed to reduce dependence on the dollar.

A report by Fortune put the situation even more bluntly: "That strikes at the heart of dollar dominance, which is in part derived from the immense size and depth of the U.S. debt market."

Implications for Gold

Central bank gold buying represents part of the "reserve diversification" Eichengreen referenced. In a note, Capital Economics economist Kieran Tompkins said the intervention increases the appeal of holding assets such as gold.

"The ability of central banks to conduct FX operations without triggering concerns from U.S. administrations about the impact on U.S. bond markets could provide fresh impetus to central banks' demand for gold."