The US Treasury just did something it hasn’t done in about 15 years: it teamed up with Japan to buy yen in the open market. Instead of selling dollars to fund the purchase, the Federal Reserve Bank of New York sold euros, a move that caught currency traders off guard and sent the yen rallying more than 1% against both the dollar and the euro.

The coordinated intervention took place on August 1, with the yen trading near 40-year lows around 163.99 to 164 against the dollar. Treasury Secretary Scott Bessent had previously indicated the purchase could land somewhere between $5 billion and $10 billion, though the final transaction size hasn’t been officially disclosed.

Why euros and not dollars

By offloading euros rather than dollars, the Treasury avoided directly weakening its own currency, strengthening the yen while also applying downward pressure on the euro, all without touching the dollar’s position in global markets.

The NY Fed executed the trades through Goldman Sachs and Morgan Stanley, routing the intervention through major dealer banks. Selling euros out of Treasury reserves reduces the euro-denominated portion of America’s foreign exchange holdings, which could matter if the dollar-euro relationship shifts meaningfully in the months ahead.

The yen’s long slide

Japan’s currency has been under sustained pressure for years, largely because the Bank of Japan has maintained an extraordinarily loose monetary policy while the Federal Reserve and European Central Bank pushed rates higher. That divergence created a carry trade dynamic where investors borrowed cheaply in yen and parked money in higher-yielding dollar or euro assets, pushing the yen to levels not seen since the mid-1980s.

The last time the US and Japan jointly purchased yen was back around 2011, in the aftermath of the Tohoku earthquake and tsunami. Japanese officials signaled after the intervention that they remain ready to act again if currency volatility persists.

What this means for crypto and broader markets

We saw a preview of carry trade dynamics in the summer of 2024, when a smaller yen appreciation sparked a rapid unwinding of carry trades that hit equities, bonds, and crypto. Bitcoin and other digital assets sold off as leveraged positions funded in yen were forced closed.

By choosing not to sell dollars, Bessent’s Treasury implicitly signaled it wants to maintain dollar strength without actively undermining it. Japanese officials’ warning that further action could follow means a potential continued carry trade unwind could create volatility spikes in crypto markets that have historically correlated with sudden yen moves.