US Treasury secretary Scott Bessent has found himself caught in a standoff with currency traders more than a fortnight after the US and Japan jointly intervened to buy yen for the first time since 1998.
The move strengthened the yen at the start of August, but it has since given back roughly half of its post-intervention gain. Currency analysts warn the fundamental drivers of a weak yen, especially a yield gap between Japan (where rates are 1%) and the US (where rates are over 3.5%), have not gone away.
Scott Bessent knows a thing or two about currency trading, says The Guardian. He was part of the George Soros team in 1992 that made a billion dollars by forcing the pound off the European Exchange-Rate Mechanism. His intervention to stabilise the yen wasn't an act of charity. Japan is a “cash spigot”, with the cheap yen funding a global “carry trade” that helps prop up US technology shares.
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If the yen's slide continues, then Japan might be forced to respond with “aggressive” interest-rate rises. That could quickly unwind the carry trade and trigger a Wall Street rout, as happened two years ago when a surprise Japanese rate rise sent global markets tumbling.
Don't worry, the risk of a “disorderly” unwind “seems low”, Masayuki Nakajima of Mizuho Bank tells Katie Martin in the Financial Times. The danger of higher Japanese rates is now “extremely well understood” by traders, who have made appropriate preparations. Rather than a snap yen rally, “all the ingredients are in place” for the carry trade to continue and yen selling pressure to persist. “It is increasingly clear that the market is in the mood for a fight” with the US Treasury.
What does Scott Bessent’s intervention mean for the global economy?
The “US currency intervention was not only ineffective, but counterproductive”, says George Saravelos of Deutsche Bank. Washington has been encouraging Tokyo to tap an emergency Federal Reserve dollar facility, inadvertently sending a signal that “it is not comfortable” with the “direct US Treasury sales” that Tokyo usually uses to prop up the yen.
If Scott Bessent's yen “ruse” was designed to keep US borrowing costs under control, then it has failed, agrees Simon Nixon on Substack. Washington's use of “unorthodox” tools, including selling euros rather than dollars to fund the yen intervention, has only “deepened the anxiety it was meant to soothe”. Bond traders sniff out hesitation like sharks detect blood in the water.
The spike in government debt isn't only affecting America. Japan's own ten-year yield hit a 30-year high on Monday, while France's has topped 4% for the first time since 2008, potentially pushing the country closer to the brink of a “debt crisis”.
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