US 'Sells Euros to Rescue Yen', But European Central Bank Was Kept in the Dark! A Currency Intervention Exposes Cracks Among Western Central Banks

The United States and Japan jointly intervened in the foreign exchange market last week to strengthen the yen. However, the US made the rare decision to sell euros rather than dollars, attracting intense market scrutiny. Moreover, the fact that the European Central Bank (ECB) was not notified until after the transaction had been executed has caused shockwaves across European decision-making circles.

According to multiple sources, senior officials at the ECB believe the US action broke long-standing coordination mechanisms among Western central banks and finance ministries established since World War II, fracturing decades of tacit monetary cooperation.

The Financial Times, citing insiders, reported that the US Treasury used the New York Federal Reserve Bank to execute trades on behalf of its Exchange Stabilization Fund (ESF), selling euros and buying yen. However, the ECB in Frankfurt was only informed after the trades were completed. ECB President Christine Lagarde and US Treasury Secretary Scott Bessent held a phone call the following day to discuss the intervention.

This type of coordinated intervention is already highly unusual. In past joint US-Japan forex interventions, the US typically used its own dollar assets. Choosing to sell euros to support the yen this time surprised markets and led some ECB officials to view the move as unprecedented—acting unilaterally using another region's currency without prior consultation.

Since World War II, major Western central banks and finance ministries have generally communicated in advance and coordinated during significant forex interventions to maintain financial stability.

One source familiar with internal European discussions said the move was “very shocking and regrettable—this has never happened before.” He warned that the mutual trust and cooperative framework built among Western central banks over decades may now be under threat.

In response, the US Treasury emphasized that decisions regarding the ESF’s asset allocation fall solely under its authority and do not require coordination with foreign authorities. It stated that its decisions are based on assessments from both the Treasury and the Federal Reserve concerning market liquidity, asset valuations, and other factors, which prompted the recent adjustment to the ESF’s foreign currency holdings.

A senior official from the Trump administration pushed back, asserting that the US respects confidentiality in private dialogues with international partners—“unlike the European Central Bank.” Neither the ECB nor the New York Fed commented on the matter.

Market analysts suggest the US chose to sell euros because directly dumping dollars could be interpreted as Washington deliberately weakening the dollar, contradicting Secretary Bessent’s consistent advocacy for a “strong dollar” policy.

Another market theory posits that US involvement may also have aimed to help Japan stabilize the yen, preventing Japan from having to sell large volumes of US Treasury bonds to fund its own intervention. With long-term US bond yields still near 19-year highs, massive Japanese sales of US debt could further push up US borrowing costs.

Preliminary data from the Bank of Japan estimates that Japanese authorities likely injected approximately ¥13.8 trillion into the forex market within just two days—already surpassing the previous record of ¥11.73 trillion set between April and May 2024.

Mizuho Securities analyst Masayuki Nakajima noted that Japan’s deployment of such a record sum over just two trading sessions reflects official anxiety over the yen’s rapid depreciation.

Following the US-Japan joint intervention, the yen briefly surged from near 164 per dollar—a level not seen since 1986—to around 157, though it has since retreated to around 158.

Nonetheless, market skepticism about the yen’s outlook persists. This stems from the Bank of Japan’s relatively slow pace of rate hikes; its last meeting kept rates unchanged. BOJ Governor Kazuo Ueda acknowledged that inflationary upside risks now demand greater attention than in the past.

Meanwhile, the US Treasury market faces mounting pressure, with long-term yields continuing to climb—reflecting market reassessment of the Federal Reserve’s policy path. Although US inflation showed signs of cooling in June, it remains distant from the Fed’s 2% target, keeping markets on high alert for future rate decisions.