Lü Shao-Wei Column: Selling Euros, Buying Yen – America's Calculated Move

The recent 'U.S.-Japan alliance' currency market intervention is most notable not for the alliance itself, but for America's novel tactic of 'selling euros to buy yen'—a fresh twist in the nearly 30-year battle for supremacy between the dollar and the euro.

Last week, the United States supported Japan’s market intervention to prop up the yen. Traditionally, to strengthen the yen, one would buy yen and sell dollars in the open market. In the 2011 U.S.-Japan joint intervention, the goal was to curb excessive yen appreciation, so the operation involved selling yen and buying dollars. The most famous coordinated intervention occurred after the 1985 Plaza Accord, when major advanced economies jointly bought yen and sold dollars to drive yen appreciation.

But this time, the approach is different. Instead of selling dollars, the U.S. is selling euros to buy yen. The rationale for buying yen remains the same: to boost the yen’s exchange rate. However, by using euros instead of dollars, the U.S. is simultaneously weakening the euro—effectively delivering a backhanded blow to Europe while supporting Japan.

In recent discussions about 'currency wars,' 'dollar hegemony,' and 'de-dollarization,' much attention has focused on whether the Chinese yuan could replace the dollar. But realistically, the currency most capable of challenging the dollar has always been the euro.

When the euro was launched in 1999, it was widely expected to either replace or at least seriously challenge the dollar’s global dominance. However, over time, several irreparable structural flaws have become apparent: the lack of fiscal union, fragmented policymaking across multiple governments, and the 'bandwagon effect' where weaker economies rely on stronger ones like Germany.

Countries joining the eurozone must give up their national currencies. The benefits are clear: elimination of most exchange rate risks and reduced transaction costs. Before the euro, trade with neighboring European countries involved dealing with dozens of different currencies and exchange rate risks. After joining, these risks vanish.

For economically weaker nations, there’s an additional, dangerous 'benefit': the ability to borrow cheaply by hiding behind stronger economies like Germany. But overreach brings consequences—the 2010 European sovereign debt crisis, exemplified by Greece and the so-called 'PIIGS' countries (Portugal, Italy, Ireland, Greece, Spain), proved this.

The fatal downside is equally clear: member states lose monetary sovereignty. They can no longer set independent exchange rates or interest rates to respond to domestic economic conditions. Normally, when a country’s economy weakens, it can devalue its currency to boost exports or cut interest rates to stimulate investment. But within the eurozone, these tools are gone.

For example, Germany’s manufacturing and exports outperform France’s, yet both use the same currency. France cannot devalue or lower rates to regain competitiveness, while Germany enjoys strong exports without facing the natural corrective mechanism of currency appreciation.

In plain terms: Germany benefits from an undervalued euro, while weaker exporters are forced to trade with an overvalued currency.

Another fatal flaw: the lack of fiscal union. Unlike a single nation, the eurozone cannot redistribute funds from strong to weak economies. This became glaringly obvious during Greece’s debt crisis, when calls for a unified fiscal system emerged—but the political difficulty made it nearly impossible, and the idea faded after the crisis.

Despite these flaws, the eurozone remains the world’s third-largest economy. Euros make up about 20% of global central bank foreign exchange reserves—far below the dollar’s 57%, but still several times higher than the yen, pound, or yuan, which each hold only 3–5%.

By this measure, the euro remains the dollar’s most credible challenger. Yet after decades of experimentation, the inherent defects of a unified currency, combined with Europe’s weaker economic performance and resilience compared to the U.S., have eroded the euro’s ambition to challenge the dollar.

This latest U.S.-Japan move to strengthen the yen—using an unusual 'sell euro, buy yen' strategy—signals more than just support for a stronger yen. It reaffirms the U.S. commitment to a strong dollar policy while subtly undermining the euro. In the future, such maneuvers may become increasingly normalized in response to geopolitical and economic needs.