As I see it | The US is telling its trading partners – do as I say, not as I do

It is not the most enticing reading material: “Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States.” But this 59-page report, issued last month by the US Treasury Department, reveals much about contemporary America. Remember the joint intervention by Japan and the United States in the international currency market to prop up the yen at the end of July? By now, everyone knows it didn’t work, a waste of monetary resources for both countries while earning a lot of ill will from the Europeans because … Well, that takes some explaining but we will get to it shortly. Let’s first consider the report, which boldly warns trade offenders that the US Treasury “is committed to aggressively and vigilantly monitoring and combating unfair currency practices” and that it “continues to assess whether the United States’ trading partners are undertaking foreign exchange intervention and implementing non-market policies and practices to manipulate their currencies for unfair competitive advantage in trade to the detriment of American economic strength”.

The report goes on to name the baddies: China, Japan, Korea, Taiwan, Thailand, Singapore, Vietnam, Germany, Ireland and Switzerland. All these economies were on the monitoring list in the report issued in January this year. So no improvement there, naughty children! Notice that Japan is on the list, recurrently.

And yet, in the same month that the US Treasury complained that other countries, including Japan, were potentially manipulating their currencies to gain an unfair trade advantage over the US, it was helping Tokyo, in a highly unorthodox move, to intervene massively in the currency market because the yen had been dropping like a stone since Japanese Prime Minister Sanae Takaichi took office. The joint intervention followed a solo move by Japan the day before to support the yen after it hit a 40-year low. You might expect US Treasury Secretary Scott Bessent to at least have the decency to use US dollars for the operation.

But no, he reportedly preferred using euros and not telling the Europeans. The operation, which was carried out by the New York Federal Reserve on behalf of the US Treasury, “blindsided” the European Central Bank, according to a Financial Times report.

While the move caused the yen to rise, the euro saw an over four per cent devaluation. A commentary in EU Perspectives, titled “US threw the euro under the bus for little reason and less gain” said: “The risk did not concern the European currency’s market standing as much as the trust within the transatlantic relationship.” While it may not be a code of conduct, central bankers are expected to warn each other in advance of such market operations. The euro was picked (on) for two reasons. First, many analysts believe that the US chose to sell euros as selling dollars would have been seen as a move to weaken the US currency, contradicting Bessent’s strong-dollar posture.

Second, it has also been widely suggested that Washington would have felt pressure to help halt the yen’s decline because Japan is the largest foreign holder of US Treasuries. If Japan had been forced to sell its dollar holdings, this would have caused American borrowing costs to rise, at a time when long-term yields are at nearly two-decade highs. Of course, treating the Europeans like dirt is now par for the course with Washington.

But the intervention didn’t even work because Japan and the US were fighting a mighty market trend. That has to do with Takaichi’s readiness to borrow like mad and suspend some taxes – somewhat akin to Liz Truss during her short stint as UK prime minister – even though Japan is already the most indebted country among its developed peers. Her government is viewed as not being in favour of raising interest rates, even though the yen is already suffering from fundamental weakness.

Meanwhile, US borrowing costs keep rising. The US$42 billion auction of 10-year US Treasuries resulted in the highest yield since 2007, at 4.683 per cent. This was followed by a US$25 billion sale of 30-year Treasuries at 5.216 per cent, the most since 2001. Bessent directly intervened this week to reverse rising US borrowing costs by doubling the purchase of long-term government debt.

Many saw the attempt as interventionist, defying long-standing Treasury practice. Barry Eichengreen, a leading authority on the US dollar system, observed in the Financial Times that the manner in which the US intervened to prop up the yen may have inadvertently signalled that “the dollar is not the attractive reserve currency it once was” and that “reserve diversification is apt to gather steam”. What this currency farce also shows is that Tokyo does what it’s told, Washington is fast losing all credibility and Europeans hardly matter.