Traders grappling with an already rare co-ordinated U.S.-Japanese action to prop up the weak yen are also digesting a further unusual dynamic: the U.S. selling euros.
Japan confirmed on Monday it had carried out yen-buying intervention on Friday with the U.S. Treasury department. But rather than buying yen and selling dollars, two market sources told Reuters the Treasury had instead bought yen for euros, confirming an earlier Financial Times report.
Analysts at HSBC said this was "a highly unusual — maybe unprecedented — step".
The move likely reflects a desire by U.S. authorities to help Japan strengthen the yen but not encourage a view that Washington wants a softer dollar — which would only complicate efforts to rein in above target inflation, currency analysts added.
"Given that at the moment the U.S. has above target inflation, a weaker dollar right now isn't the best thing for them," said Lee Hardman, senior currency analyst at MUFG.
A bump to inflation from a broadly weaker dollar could give a divided Federal Reserve more cause to raise U.S. interest rates.
Japan's Ministry of Finance also intervened in markets on Thursday and in addition to Friday's action, there were further sharp moves on Monday that were potentially intervention-driven.
The yen, trading at around 157 per dollar, has recovered from 40-year lows near 164. It strengthened almost 4% last week, its biggest weekly jump in two years.
"The choice of intervention currency by the U.S. Treasury avoids signaling a desire for broad-based dollar weakness, in our view, keeping the operation a yen-only affair," Barclays analysts said in a note.
The euro has fallen from as high as 187.4 yen on Thursday to dip briefly below 180 on Monday, an over 4% move.
Moves in one currency pair shake out across the market near instantaneously as banks and traders reprice what a move in euro/yen for example means for the dollar/yen and euro/dollar exchange rates.
BROADER COORDINATION?
Central bank data indicated on Monday that Japan may have spent as much as $36.58 billion buying yen during Friday's joint intervention.
Focus now turns to the longer term implications of the U.S. selling euro/yen.
MUFG's Hardman said it was unlikely to have much effect on the euro given the relatively limited amount of the currency held by the United States.
The U.S. has around €26 billion readily available for intervention across its System Open Market Account and the Exchange Stabilization Fund, according to the latest data.
A European Central Bank spokesperson declined to comment on reports the U.S. authorities had sold euros for yen, though a source familiar with the events said the ECB had been in contact with the Fed over this issue.
The U.S. Treasury did not respond to a request for comment, while the New York Fed, which typically carries out interventions on its behalf, declined to comment.
The next question is what it means for the yen, and whether central banks are coordinating more broadly.
Reuters reported last week South Korea had coordinated with Japan when it sold dollars and bought won.
"It would be far more significant if the ECB sells euro/yen — as that would look like a currency accord among the major economies to strengthen the yen," said HSBC analysts.
"That would be a low probability, but high impact event."
