Yen Intervention Exposes Dollar Vulnerabilities

The recent joint US-Japan intervention to prop up the yen has revealed that its main purpose was to stabilize the dollar and US financial markets, rather than address Japan's currency problems.

US President Trump initially claimed the intervention was a gesture of friendship towards Japan, which is 'very, very strong financially.'

However, analysis suggests that the real concern was that Japan's Ministry of Finance might start selling US Treasuries to buy yen, depressing the price of long-term bonds and pushing up interest rates. This could have had a negative impact on the AI stock market bubble, which is heavily dependent on debt financing.

Economist Barry Eichengreen noted that this concern was reflected in the decision by the US to conduct its support using euros instead of selling more Treasuries. He also pointed out that Japan's use of a short-term lending facility provided by the Federal Reserve, rather than selling Treasuries, indicated 'that the dollar's status as a reserve currency is not what it used to be.'

The intervention was seen as an attempt to prevent the yen from rising too much, which would have hit the carry trade and put pressure on US stock markets. The Bank for International Settlements has estimated that the size of the carry trade is in the range of hundreds of billions or even trillions of dollars.