US shakes up currency markets with talk of unusual yen-buying via selling euros

• The yen recovered from 40-year lows near 164 per dollar to around 157, strengthening almost 4% last week in its biggest weekly jump in two years
• Japan may have spent as much as $60 billion buying yen during Friday's joint intervention, while the U.S. has only about €26 billion readily available for intervention
• Analysts note selling euros instead of dollars avoids signaling broad dollar weakness, which could fuel inflation and prompt the Federal Reserve to raise interest rates further

Summary: U.S. Shakes Up Currency Markets with Unusual Yen-Buying via Euro Sales

The U.S. Treasury conducted a rare coordinated intervention with Japan on August 3rd to support the yen, employing an unprecedented strategy of selling euros rather than dollars to purchase yen. This marks a highly unusual move in currency intervention tactics.

Key Developments:

• Japan confirmed joint intervention with the U.S. Treasury on Friday following independent action on Thursday
• The yen has recovered from 40-year lows near 164 per dollar to around 157, strengthening almost 4% last week—its biggest weekly jump in two years
• The euro/yen pair fell from 187.4 on Thursday to briefly below 180 on Monday, a decline exceeding 4%
• Japan potentially spent significant amounts buying yen during Friday's joint intervention, according to central bank data

Strategic Rationale:

Analysts view the euro-selling approach as calculated to avoid signaling dollar weakness, which would be counterproductive to U.S. inflation management. With U.S. inflation above target, a weaker dollar could complicate Federal Reserve efforts and potentially trigger additional rate increases. HSBC called this "a highly unusual — maybe unprecedented — step."

Market Implications:

The U.S. holds approximately €26 billion available for intervention across its accounts, limiting the operation's impact on the euro. However, speculation is growing about broader central bank coordination after South Korea also reportedly received U.S. assistance with won purchases last week.

Analysts suggest the most significant development would be if the European Central Bank joined by selling euro/yen, potentially signaling a major currency accord among developed economies—described as "low probability, but high impact."