Mnuchin Warns of Global Market Instability Due to Yen Volatility

US Treasury Secretary Steven Mnuchin warned that disorderly movements in the Japanese yen could trigger forced liquidations of financial positions and risk disrupting global market stability.

This warning was made by Bessent, as quoted by Reuters, in a letter dated August 27th. The letter was published in response to a request from US Senator Elizabeth Warren seeking an explanation of why Washington joined Japan in intervening in the foreign exchange market at the end of July.

The intervention was one of the rarest currency interventions in several decades and was aimed at preventing the yen's weakness and a sell-off in Japanese government bonds from spreading to global markets. The US Treasury intervened by exchanging foreign currency assets held through the Exchange Stabilization Fund (ESF) for yen, with Bessent comparing the move to stabilising Argentina's peso market the previous year.

Bessent said sharp volatility in the yen market could trigger forced unwinds, which could spread to global financial markets and ultimately increase borrowing costs for households and businesses in the United States. The yen had previously weakened to nearly 164 per US dollar, its lowest level in around 40 years, before strengthening to around 155.20 per US dollar after the intervention.

The yen has since weakened again towards 160, with the US dollar breaking above this level in New York trading on Friday amid growing expectations that the Federal Reserve could raise interest rates in the near term following comments by Fed Chair Jerome Powell.