Why Is the U.S. Treasury Intervening in Currency Markets and What Does It Mean for Investors?

Unlike many nations, the U.S. government has historically tried to avoid intervening in currency markets.

The dollar floats freely on global exchanges, and the U.S. Treasury Department generally likes to keep it that way. Occasional utterances by Treasury Secretaries, beginning with Robert Rubin during the Clinton Administration, that the U.S. has a "strong dollar policy" are purely rhetorical, meaning the rhetoric is the entire policy.

But once in a while, Uncle Sam deems it necessary to buy or sell other nations' currencies when their exchange rates reach extreme and unhealthy levels. That's exactly what happened in recent days. And it has consequences for U.S. investors, too.

Late last week, the U.S. and Japanese governments teamed up to defend the yen, which recently hit a four-year low against other major world currencies. It was the first such intervention in 15 years.

Image source: Getty Images.

The yen has been weakening against the dollar for years and hit a 40-year low in July. That's partly due to market expectations that the Federal Reserve will have to raise rates to counter inflation resulting from the Iran war-related oil shock. Also, the Bank of Japan has held its benchmark interest rate low for years. Global capital tends to flow to countries with higher interest rates, so currency traders have been selling the yen to buy the dollar, pushing the Japanese currency lower.

The U.S. has its own interests in mind, too

The U.S. intervention certainly helps Japan. But it's a good thing for investors in the U.S., too. Japan is the largest holder of U.S. government securities. If it had to sell a significant portion of them to fund the intervention on its own, that could have triggered a decline in Treasury prices and an increase in yields of those securities.

Suddenly higher Treasury yields hurt equity prices in multiple ways, from driving up interest rates on mortgages and car loans to providing an attractive alternative to stocks (because Treasury securities carry near-zero risk). So, the U.S. assist on the yen intervention was also a self-interested move.

And with currency markets in particular, expectations about what the Treasury Department will do are often enough to move currencies in the desired direction. That's why Treasury Secretary Scott Bessent wrote "To Do: Buy Japanese Yen (JPY) $5-10 bil" on his notepad at a recent meeting where journalists could clearly see it. In fact, a Reuters photographer got a great picture of the notepad "to do" item.

As in Robert Rubin's day, sometimes rhetoric is enough. And currency markets have reacted positively, with the yen strengthening against other currencies in recent days. That's a good thing for now, but the fundamentals of Japan's economy will also need to be addressed to prevent the yen from falling back.

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