US Treasury and Japan Team Up to Stabilize Yen, Raising Questions About Dollar's Future

Recently, the US Treasury Department joined forces with Japan to stabilize the yen, which had dropped to its weakest level in over four decades. The intervention came as a surprise, and its motives are still unclear. However, it's evident that both countries want to prevent a further decline in the yen, which could lead to higher import prices and inflation in Japan.

Treasury Secretary Scott Bessent requested that the Federal Reserve expand its Foreign and International Monetary Authorities (FIMA) repurchase agreement facility to support markets during currency interventions. This move is seen as an attempt to prevent fire sales of Treasuries, which could increase market volatility. The current daily limit for FIMA is $60 billion, but Bessent wants it increased.

Some experts, like James Mackintosh of the Wall Street Journal, argue that this intervention has monetary policy implications and expands the Fed's balance sheet, contradicting its previous goal of shrinking the balance sheet. Others, such as Barry Eichengreen, believe that the magnitude of the intervention is too small to have a significant impact on the yen unless the Bank of Japan raises interest rates.

While the US-Japan joint action may seem positive in terms of cooperation between the two countries, it also raises questions about the role of the dollar as a reserve currency. Eichengreen notes that the Treasury Department is concerned about foreign central banks selling their dollar reserves and suggests that this could indicate a decline in the dollar's attractiveness.