The US, Japan, and South Korea have executed their largest coordinated foreign exchange intervention in nearly three decades this week. This action targets the depreciation pressures on the Japanese yen and South Korean won, and is viewed as a critical move by the US to stabilize the financial markets of its Asian allies and prevent risk spillover.
This intervention covers both the yen and the won. Japanese and South Korean foreign exchange authorities have been selling US dollars to support their currencies. Meanwhile, the US has intervened in the yen exchange rate through non-dollar channels, selling euros and buying yen to alleviate yen depreciation pressure while avoiding direct pressure on the US dollar. Currently, markets in Japan and South Korea are under sustained strain: the KOSDAQ index has fallen to its lowest since October 2022, with a notable tech sector correction, and both the yen and won have weakened against the US dollar, raising concerns about potential chain reactions in Asian assets.
Unlike past efforts focused solely on stabilizing exchange rates, this coordinated action is seen as a market rescue for Japan and South Korea. As their stock markets remain under pressure and tech stocks undergo significant adjustments, the US aims to boost market confidence by stabilizing exchange rate expectations, preventing further risk transmission. Both Japan and South Korea are vital players in the US semiconductor and AI supply chain, and stabilizing their asset markets helps reduce the risk of financial strain spreading to the tech supply chain and US markets.
According to reports, on July 31, the US Treasury Department, through the New York Federal Reserve, commissioned Goldman Sachs and Morgan Stanley to sell euros and buy yen, marking the first direct US involvement in yen intervention in nearly 30 years. Previously, Japanese authorities reportedly intervened in the currency market on July 30, using approximately 8.45 trillion yen (about $52.8 billion). Additionally, South Korean foreign exchange authorities also intervened by selling US dollars, pushing the won up 2% in a single day to its highest level in nine months. Driven by this tripartite effort, the dollar-yen rate quickly fell from above 162 to the 157-159 range, helping the yen move away from its 40-year lows. South Korean Vice Finance Minister Moon Ji-sung stated that the country is maintaining close coordination with the US and Japan, while Japan's Vice Finance Minister for International Affairs Atsushi Mimura noted that US support has "gone beyond mere moral support."
The US Treasury's direct involvement in the yen exchange rate is the most significant change. Unlike past reliance on verbal warnings, the US has now engaged in actual transactions to intervene in the yen. The New York Fed conducted the operation through Goldman Sachs and Morgan Stanley, selling euros and buying yen. Prior to this, the US Treasury signaled potential intervention to several Wall Street institutions and communicated with the European Central Bank. Before officially entering the market, the New York Fed had sent policy signals for two consecutive days, conducting "rate checks" on the dollar-yen and later the euro-yen, which the market interpreted as a precursor to formal intervention.
Bank of America Securities' FX strategist Alex Cohen noted in a report that the "rate check" sits between verbal intervention and actual action, representing a new tool the US Treasury has started using this year to signal policy without committing funds. However, he cautioned that without subsequent implementation, the market might test the authorities' credibility. Notably, the New York Fed partially chose to operate through the euro-yen pair rather than the dollar-yen, which analysts suggest allows the US to influence the yen's depreciation through non-dollar channels, relieving pressure on the yen without adding strain to the US dollar. In terms of scale, Japanese authorities deployed approximately 8.45 trillion yen (about $52.8 billion) on July 30 to support the yen, following a previous intervention of about 11.7 trillion yen between April and May.
The significance of the US intervention may extend beyond traditional exchange rate management. In a recent report, Bank of America strategist Michael Hartnett described the US-Japan-South Korea coordinated action as akin to a "Price Keeping Operation" (PKO) for the AI era, with the core goal of preventing continued pressure on assets of AI supply chain allies like Japan and South Korea. Hartnett believes the US aims to mitigate three types of risks: first, preventing rapid yen depreciation from causing a sharp rise in Japanese government bond yields; second, avoiding financial stress from spreading to Asian markets like South Korea and Japan; and third, reducing the impact of disorderly capital flows on the US bond market. Recently, pressure on the South Korean market has intensified, with the KOSDAQ index hitting its lowest since late 2022 and major Korean brokerage stocks undergoing corrections. Meanwhile, the AI investment fever has not significantly cooled, with semiconductor ETFs attracting about $53 billion in inflows year-to-date, despite the recent pullback in the Philadelphia Semiconductor Index (SOX). Hartnett suggests that the simultaneous appearance of coordinated intervention and market corrections may indicate that highly leveraged trades are nearing an end. However, current policies are more focused on controlling market volatility rather than changing trends through liquidity measures.
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