Euro Twist: U.S. Employs Unconventional Strategy to Back the Yen

The U.S., by selling euros to support the yen, has sparked a series of strategic questions in the financial world.

Euro Twist: The U.S.'s Unconventional Yen‑Backing Strategy

The U.S. Federal Reserve and Japan jointly intervened to lift a yen that had slumped to a 40‑year low, but this time the tactic deviated from the norm: instead of selling dollars, the New York Fed sold euros to fund the purchase.

Coordinated Intervention: The First Move Against a Four‑Decade Drop

■The yen fell to 157 USD, hitting a 40‑year low in 2023.

■This joint U.S.–Japan intervention is the first since 1998.

■Japan’s estimated outlay was $52.8 billion, with the U.S. contribution ranging between $5‑10 billion.

Market Confidence: The Third‑Currency Play

■Experts such as Robin Brooks and Edwin Truman warned that using euros could create market confusion and dilute the efficacy of the intervention.

■FX interventions are described as a “confidence game”; a third currency may undermine that confidence.

Fundamental Weakness: The Yen’s Persistent Decline

■Since 2012, the yen has been steadily sliding against the dollar.

■Bank of Japan keeps bond yields artificially low to manage its massive debt burden, narrowing U.S.–Japan rate differentials.

■Japan’s “overly accommodative” monetary policy and high debt levels weaken the yen’s fundamentals.

A New Era: The Rising Role of the ESF

■The U.S. Exchange Stabilization Fund (ESF) was used in both the Argentine peso and yen interventions.

■These episodes signal a shift toward a more active U.S. FX policy.

■Long‑term, the U.S. may adopt a more aggressive “active intervention” strategy.

In this new euro‑based intervention, the U.S. risks delivering only a short‑term “inflection point” without addressing the yen’s underlying fundamentals. For a sustainable recovery, Japan must improve rate differentials and reduce debt; otherwise, the U.S.’s effort will merely provide temporary market “boosts.”