Over the past year and a half, the US administration has criticized, threatened, provoked, offended, and at times humiliated its European partners. This has been done with the most protectionist wall in a century and punitive tariffs time and time again, with all kinds of arguments and far-fetched excuses. It has been done within NATO, playing with the idea of forcibly annexing Greenland, not defending members, and starting to withdraw troops and considering which bases to close. It has been done in its National Security Strategy, stating that the Old Continent is more of a civilizational problem than an ally. It has been done with criticisms and attacks on digital and tax laws in the community and with accusations as serious as claiming that there is no freedom of the press in Europe. The challenge has been political, geopolitical, tariff-related, and commercial. But now it has taken an additional leap by encompassing a new dimension: the monetary one.
On July 31, during a meeting of Donald Trump's cabinet at Camp David, a Reuters photographer captured an image of the notepad in front of Treasury Secretary Scott Bessent. The only note clearly read: "Task pending: buy Japanese yen, 5-10.000 billion [dollars]". The photograph, clearly sought after, appeared just as the agency had already reported that the US Treasury was preparing a new intervention to support the yen. A few days later, both countries confirmed it, precisely within the range being considered.
This is not the first time and probably will not be the last, but it is the most significant joint operation in 15 years. The US Treasury intervened to halt the depreciation of the Asian currency, but did so in an unusual way: instead of selling dollars to buy yen, or allowing Tokyo to do so, the United States sold euros and used those resources to acquire Japanese currency. In this way, Washington could support its ally without directly putting selling pressure on its currency. But at the same time, it indicated that Washington is very afraid that central banks around the world will get rid of their dollars in times of stress because it would add additional pressure to the tense bond market, which has been very sensitive in recent months to what is happening in the Capitol, but also in the Strait of Hormuz.
An intervention with a message for Europe
The execution had the infrastructure of the New York Federal Reserve, which acted as the Treasury's operational agent. However, as Financial Times revealed, US authorities did so without informing the European Central Bank beforehand, which learned about the sale of euros in the market. In another moment in history, the decision would have been inelegant, controversial, but perhaps isolated or anecdotal. But considering the precedents, it is difficult to see it that way.
The United States has given an unprecedented shake-up in 18 months to the international system that emerged in Bretton Woods under the premise that globalization and the financial system are harmful to the US, a nonsense from almost every imaginable perspective. And this new action brings the possibility of an additional change in the architecture of international monetary coordination, another of the great pillars since the 1970s.
For decades, in major currency crises, we have seen coordinated operations between the major central banks and G7 members. The classic example is the coordinated intervention of 1998 to stabilize the yen and closely linked Asian currencies, but one can also go back to the Plaza Accords of 1985 when the United States forced, but at least in a coordinated manner, all its allies to help devalue the dollar against the yen, the mark, the pound, or the franc.
This administration has made it clear from the beginning that it does not believe it is necessary to ask for permission or forgiveness. Last year, there was much talk worldwide about the "detoxification" plan of Stephen Miran, head of the White House Economic Council who has recently spent a few months precisely at the Federal Reserve. After the 2024 election victory, he published a lengthy 40-page essay titled User's Guide to Global Trade System Restructuring analyzing the steps to weaken the dollar's value while strengthening its global power, something that would require "careful planning, precise execution, and attention to measures to minimize adverse consequences," he said at the time.
Unlike Ronald Reagan, Trump has chosen to do it without coordination, without agreements, but almost by force. Threatening with retaliation or tariffs against those who oppose any step. Whether it be the BRICS, who are considering moving away from the dollar as the world's reference currency, or the Europeans. The underlying Trumpian philosophy has always been very clear. For him, the EU was only created to "screw the United States", so any defensive measure is justified.
"Last week's intervention contains worrying information about the dollar. The message is that the US Treasury Secretary, Scott Bessent, and his team feared that the sale of dollar securities to support the yen would exert additional pressure on the long segment of the US Treasury bond market. This segment was already under pressure after the poorly received press conference by Federal Reserve Chairman, Kevin Warsh, last week. The sale of euros reflected, in part, the funds available to the United States to divest from its monetary stabilization fund. But it also is a way to prevent the market from absorbing additional Treasury bonds sold to reduce exposure to the dollar, which would have worsened an already delicate situation," wrote in a highly commented article the economist from Berkeley Barry Eichengreen, one of the world's leading experts on the issue.
What is becoming clear in the market is that Japan has a problem, but the US has an even bigger one and the status of the dollar as a reserve currency is no longer what it used to be. "Central banks are used to holding currency reserves in dollars due to the liquidity of the US Treasury bond markets. Central banks hold US Treasury bonds because they can be freely bought and sold and used in interventions. But not anymore, at least not in unlimited quantities," Eichengreen continues.
A currency becomes a global reserve if it is backed. The dollar has had the backing of the planet's only superpower, but the status is only guaranteed as long as the other players feel secure. So far, there have been no alternatives because Europe remains distracted by internal fights (fiscal, monetary, and migratory) and fails to seize its opportunities. And because China is not yet ready. But doubts are becoming increasingly evident. "If US bond reserves cannot be sold in a crisis without worsening that crisis by threatening a debt spiral, then the bonds are no longer suitable for the purpose as currency reserves. In contrast, earlier this year, gold reserves were easily and quickly sold and de-escalated the crisis," pointed out Luke Gromen, macroeconomic analyst, investor, and founder of FFTT.
Therefore, the US Treasury pressed to remove limits on mechanisms like the FIMA Repo Facility, which allows Japan to obtain dollars using its bonds as collateral, instead of having to sell them massively. Tokyo holds over a trillion dollars in US debt, and an inevitable liquidation would inevitably spike US yields. The mechanism is not the same as quantitative easing by central banks, but it has similar effects, at least on the balance sheets. Intuitively problematic if the Fed ends up having to raise interest rates to control inflation.
US debt is enormous and growing, as is its deficit. A structural problem that is only possible because of the global role of the dollar. The stock market is booming, but the debt markets and their watchdogs remain delicate. They were the only ones last April who managed to halt or soften Trump's global trade war. And they have the final say now. When the bond is below 4%, Bessent breathes a sigh of relief and boasts. But borrowing costs are already around 4.6%, and 30-year interest rates exceed 5% for the first time since the great financial crisis. Partly due to doubts about the new leadership at the Federal Reserve and the room to raise rates. Partly because of Iran. Partly because the underlying problem cannot be postponed indefinitely.