Original Author: Li Jia
Original Source: Wall Street News Agency
This week, the United States, Japan, and South Korea jointly conducted the largest coordinated foreign exchange intervention in nearly three decades. This action not only targeted the depreciation pressures on the Japanese yen and the South Korean won but was also seen as an important US measure to stabilize the financial markets of its Japanese and South Korean allies and prevent risk spillover.
This action covered two major Asian currencies, the yen and the won. Both Japanese and South Korean foreign exchange authorities supported their currencies by selling US dollars; the US intervened in the yen exchange rate through non-dollar channels, selling euros and buying yen to ease yen depreciation pressure and avoid putting pressure on the dollar.
Currently, Japanese and South Korean markets remain under pressure: the South Korean KOSDAQ index fell to its lowest point since October 2022, with significant adjustments in the technology sector; the exchange rates of the Japanese yen and the South Korean won against the US dollar also weakened consecutively, raising market concerns that further depreciation could trigger chain reactions in Asian assets.
Unlike past interventions aimed solely at stabilizing exchange rates, this coordinated action was viewed by the market as a "market rescue" operation targeting Japanese and South Korean financial markets. Amid persistent pressure on Japanese and South Korean stock markets and significant adjustments in the technology sector, the United States hopes to boost market confidence and prevent further risk transmission by stabilizing exchange rate expectations.
Both Japan and South Korea are key participants in the US semiconductor and AI supply chains. Stabilizing their asset markets helps reduce the possibility of financial risks spreading to the technology industrial chain and the US market.
US, Japan, South Korea Rarely Coordinate to Intervene in FX Market; Yen, Won Surge
According to the UK's Financial Times, on July 31st, the US Treasury, via the New York Federal Reserve, commissioned Goldman Sachs and Morgan Stanley to sell euros and buy yen, marking the first direct US participation in yen intervention in nearly 30 years.
Previously, it was reported that Japanese authorities had used approximately 8.45 trillion yen (about $52.8 billion) to intervene in the FX market on July 30th alone. Additionally, according to Reuters, South Korean foreign exchange authorities also made a rare move into the market to sell US dollars on the same day, pushing the won up 2% in a single day to a nine-month high.
Driven by the tripartite joint effort, the USD/JPY pair quickly fell from above 162 to the 157-159 range, with the yen clearly moving away from its 40-year lows. South Korea's Vice Finance Minister Moon Ji-sung stated that South Korea is maintaining close coordination with the US and Japan; Japan's Vice Minister of Finance for International Affairs, Atsushi Mimura, also noted that US support had gone "beyond mere moral support."
US First Directly Participates in Yen Intervention, Sending Policy Signal
The US Treasury's direct intervention in the yen exchange rate is the market's most noted change. Unlike the past, which relied mainly on verbal warnings, the US has this time, unusually, participated in yen intervention through actual transactions.
According to the Financial Times citing informed sources, the New York Fed implemented the intervention through Goldman Sachs and Morgan Stanley selling euros and buying yen. Before the action, the US Treasury had signaled to several Wall Street institutions about a possible intervention and maintained communication with the European Central Bank.
Formal market entry was preceded by the New York Fed releasing policy signals for two consecutive days. On Thursday, the New York Fed conducted a "rate check" on USD/JPY, i.e., asking dealers for current tradable exchange rates without immediately executing trades; on Friday, it shifted to a "rate check" on EUR/JPY. The market widely regarded this operation as a precursor to formal intervention.
New York Fed's "Rate Check" Operation Explores New FX Intervention Method
Alex Cohen, a forex strategist at Bank of America Securities, stated in a report that the "rate check" falls between verbal intervention and actual intervention. It is a new tool the US Treasury began using this year to signal policy to the market without actually deploying funds. However, he also cautioned that without follow-up actual actions for support, the market may still test the authorities' policy credibility again.
Notably, the New York Fed partially chose the EUR/JPY pair for operation this time, not USD/JPY. Analysis suggests that this shows the US may hope to exert influence through non-dollar currency channels, easing yen depreciation pressure while avoiding putting additional pressure on the US dollar.
On the Japanese side, they had already intervened in the FX market on a large scale earlier. According to official data and market estimates, Japanese authorities used about 8.45 trillion yen (approximately $52.8 billion) on July 30th to support the yen, marking another large-scale intervention following the cumulative injection of about 11.7 trillion yen from April to May this year.
US Goal Not Solely to Stabilize Exchange Rate, But to Maintain Asset Stability of AI Allies
The significance of the US intervention this time may go beyond traditional FX intervention.
Bank of America strategist Michael Hartnett stated in his latest report that this US-Japan-South Korea coordination resembles an "AI-era Price Keeping Operation (PKO)," with the core objective of preventing assets of AI industrial chain allies like Japan and South Korea from remaining under persistent pressure.
Hartnett believes that the US hopes to mitigate three types of risks: First, preventing rapid yen depreciation from driving sharp increases in Japanese government bond yields; Second, avoiding the spread of financial stress to Asian markets like South Korea and Japan; Third, reducing the impact of disorderly capital flows on the US bond market.
Recently, pressure in the South Korean market has clearly increased. The KOSDAQ index fell to its lowest point since October 2022, and shares of major South Korean securities firms have also been adjusting continuously.
Meanwhile, the AI investment boom has not shown clear signs of cooling down. Bank of America data shows that semiconductor ETFs have attracted approximately $53 billion in net inflows this year. Although the Philadelphia Semiconductor Index (SOX) recently retreated, investors continue to bet on the long-term growth of the AI industrial chain.
Hartnett believes that the coordinated intervention coinciding with market adjustments may indicate that previous highly leveraged trading is coming to an end. However, current policies are more about controlling market volatility rather than changing the trend through liquidity policies.
