U.S. Bypasses ECB to Sell Euros in Support of Yen, Europeans Feel "Betrayed"

The United States sold euros to support the yen exchange rate without prior notification to the European Central Bank (ECB), a move that deeply shocked the ECB and triggered a rare crisis of trust among major Western central banks.

According to a Friday report by the UK's Financial Times, multiple sources familiar with the matter revealed that the U.S. Treasury executed the euro sale through the Federal Reserve Bank of New York last Friday, with the ECB only learning of the transaction after it was completed.

ECB President Christine Lagarde and U.S. Treasury Secretary Scott Bessent subsequently held a call on Saturday to discuss the intervention. Some senior ECB officials characterized the U.S. action as an "unprecedented violation" of the long-standing cooperative practices among Western monetary authorities.

An individual familiar with discussions within European policy circles stated that the intervention was "very shocking" and "sad," warning that the close cooperation among Western central banks, which has supported financial stability and economic growth for decades, may now be under threat.

Bypassing the ECB: An Unprecedented Operation

This intervention marks the first time in nearly 30 years that the U.S. and Japan have jointly acted to boost the yen. However, the method of execution broke with convention—the U.S. utilized euros rather than dollars.

A U.S. Treasury Department spokesperson told the Financial Times that the Treasury does not coordinate with foreign authorities on decisions regarding the allocation of reserve assets when utilizing the Exchange Stabilization Fund (ESF). "Decisions on the allocation of ESF reserve assets are made by the U.S. Treasury, taking into comprehensive consideration assessments by the Treasury and the Federal Reserve regarding market liquidity, valuation, and other relevant factors," the spokesperson said. "Last week, the Treasury reconfigured reserve assets within the ESF based on the aforementioned authority."

A senior official in the Trump administration responded, "We respect the confidentiality of private discussions with international counterparts, which differs from the approach of the European Central Bank." Analysts pointed out that the U.S. choice to sell euros instead of dollars was aimed at avoiding the risk of the operation being interpreted as a deliberate attempt to depress the dollar exchange rate, which would contradict the strong-dollar policy advocated by Secretary Bessent.

However, the deeper implications of this event may extend far beyond exchange rates. Since the end of World War II, Western central banks and treasuries have formed a cooperative framework based on mutual trust and prior consultation, with currency market interventions typically conducted in a coordinated manner.

Nevertheless, the U.S. use of euro reserves without prior notification has led European officials to feel that this framework is being eroded. Some analysts have expressed concern over whether the foundation of trust accumulated through decades of cooperation among Western central banks has been shaken.

Scale of Yen Intervention Sets Historical Record

The backdrop to this joint intervention was the yen exchange rate falling to its lowest level in nearly 40 years. Earlier this month, the yen dropped to approximately 164 against the U.S. dollar, its lowest level since 1986. Following the joint intervention by the U.S. and Japan, the yen rose to around 157, but has since fallen back to near 158.

According to estimates by Masayuki Nakajima, an analyst at Mizuho Bank, based on preliminary data from the Bank of Japan, Japan's unilateral intervention volume over two trading days amounted to approximately 13.8 trillion yen (about $87 billion). "The funds Japan deployed in just two trading days exceeded the previous record intervention (11.73 trillion yen from April to May this year), highlighting the authorities' high alertness to the rapid depreciation of the yen," said Masayuki Nakajima.

Meanwhile, economists and analysts speculate that one reason for the U.S. joining the intervention was the desire to prevent Japan from massively selling U.S. Treasury bonds at a time when long-term borrowing costs in the U.S. are approaching 19-year highs.

Expectations of BOJ Rate Hikes Rise, But Market Concerns Persist

Although the intervention temporarily stabilized the yen, market concerns about the yen's trajectory have not dissipated. Traders warn that the Bank of Japan's pace of tightening monetary policy remains sluggish.

At its most recent meeting in July, the Bank of Japan kept interest rates unchanged, but Governor Kazuo Ueda stated, "We believe there is a greater need to focus on upside risks to inflation compared to before." Currently, market traders estimate a 44% probability that the Bank of Japan will raise interest rates at its next meeting in September.

At the same time, yields on long-term U.S. Treasury bonds have risen significantly, as traders digest the increasing expectation that the Federal Reserve will maintain current interest rate levels. Although U.S. inflation eased in June, it remains well above the Federal Reserve's 2% target.