Bessent Uses Euro Reserves to Prop Up the Yen
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- Treasury Secretary Scott Bessent coordinated with the Bank of Japan last week to stem the yen's decline, a highly unusual joint intervention that initially sent the yen sharply higher before it resumed sliding by week's end.
- The US Treasury used a little-used Federal Reserve facility to convert euros into yen rather than dipping into its dollar reserves, letting it help strengthen the yen without selling dollars at a time when demand for Treasuries is fragile.
- Japan's yen had fallen 10% over the past year, driven by carry trades and inflation worsened by oil price increases since the start of Trump's war in Iran, with Japanese inflation of 1.7% climbing at a 0.1% average monthly rate.
- Japan's bond market is under strain: interest rates have shot up nearly 1.5 percentage points over the past year as demand for Japanese bonds falls below supply.
- US borrowing costs are rising in parallel, with the 10-year Treasury yield up nearly half a percentage point since the start of the year and each percentage-point increase adding roughly US$400-billion to the federal deficit.
- Bessent's trading pedigree at George Soros's fund — where the mantra was 'you can't beat the market' — puts him in the awkward position of now trying to beat currency markets as the world's most powerful finance official.
Why it matters: The euro-for-yen swap reveals how intertwined US and Japanese bond markets have become: Japan's rates have climbed 1.5 percentage points in a year while each additional point on US yields adds roughly $400-billion to the deficit, meaning Bessent's firepower to defend the yen shrinks as the very problem he is trying to manage worsens.
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