A rare move in the FX market: US sells euros to strengthen the Japanese yen

The United States and Japan have taken an extremely unusual step in the global foreign exchange market in an attempt to curb the weakening of the Japanese yen. The intervention, considered one of the most exceptional in recent years, involved direct cooperation between the two governments and was intended to stabilize the Japanese currency, which had been suffering from significant market pressure.

According to a Reuters report, the US Treasury Department, through the Federal Reserve Bank of New York, chose an unconventional method for the intervention. Instead of selling dollars and buying yen, as is customary in such cases, the United States sold euros from its foreign exchange reserves and used them to purchase Japanese yen. This is an extremely rare move, which analysts described as almost unprecedented in the modern foreign exchange market.

The move surprised investors and traders around the world because it differs from the accepted models of intervention by central banks. According to analyst estimates, this involved the use of an operational mechanism reminiscent of intervention programs from the nineties, which many in the market believed were no longer in use.

Behind the decision lay a complex economic dilemma. On one hand, the United States sought to help Japan, one of its key allies, cope with the weakening of its local currency. On the other hand, selling dollars could have weakened the American currency, made imports to the United States more expensive, and increased inflationary pressures at a time when the Federal Reserve is still working to curb inflation. Using the euro allowed Washington to support Japan without creating direct pressure on the dollar exchange rate.

The move also had broader significance for capital markets. If Japan had been forced to continue supporting the yen alone, it might have sold large quantities of US government bonds to finance the intervention. Such a move could have led to a rise in US bond yields and affected financing and borrowing costs in the United States. The joint intervention helped reduce this pressure.

In addition, the move was perceived as a clear geopolitical signal from Washington, indicating its commitment to Japan's economic stability. This is also the first official intervention by the United States and Japan in the foreign exchange market since 2011, when both countries acted following the earthquake and tsunami in Japan.

The intervention caused sharp volatility in several major currency pairs, including dollar-yen, euro-yen, and euro-dollar, and forced many investors to quickly close positions built on the continued weakening of the yen. Markets estimate that the move may also affect "carry trade" transactions, in which investors borrow yen at a low interest rate and invest the money in assets with higher yields, which may increase volatility in financial markets in the near future.