The U.S. Federal Reserve confirmed yesterday that its trading desk did conduct a rare “rate check” on the exchange rate between the U.S. dollar and the Japanese yen on behalf of the White House earlier this year. The move is often regarded as a precursor to actively intervening in currency markets. In this case, the implication would be that the U.S. Treasury wanted to strengthen the yen versus the dollar (or, vice versa, weaken the dollar versus the yen).
Indeed, that is exactly what happened on the foreign exchange markets on January 23 of this year. The dollar had been trading at ¥158.50 but then collapsed suddenly to ¥152.45 by January 27—a relatively sharp move for such large international currencies.
In the minutes of its last meeting, the Fed said that private markets had expected the dollar to continue weakening this year but the U.S. economy had done so well that those expectations had “moderated quite a bit.” The dollar was slowly gaining strength versus the yen, approaching ¥160.
But then, the Fed said, U.S. Treasury officials asked the Fed’s trading desk to get a quote for a significant purchase of yen—a move that would weaken the dollar again and bid up the Japanese currency. As a result, “the dollar…depreciated markedly after reports that the Desk had made requests for indicative quotes, known as ‘rate checks,’ on the dollar–yen exchange rate. The manager noted that the Desk had requested those quotes solely on behalf of the U.S. Treasury in the Federal Reserve Bank of New York’s role as the fiscal agent for the U.S.”
The implication of the move is that the White House wants the dollar to remain weak compared to foreign currencies. A weak dollar means U.S. goods and services are cheap, by comparison, for foreign businesses and investors. It’s a way of boosting U.S. exports and foreign investment into America.
ING analyst Chris Turner was shocked by the move. “What also stood out to us in the minutes was the Fed’s full disclosure on the USD/JPY rate check. The minutes confirmed that the New York Fed did check rates in USD/JPY on behalf of the US Treasury and in its role as the fiscal agent of the US. This likely happened at 5:00pm London time on Friday, 23 January, when USD/JPY was trading around 157,” he told clients this morning.
“Something like this is extremely rare in foreign exchange markets and is a sign of a more activist White House when it comes to FX [foreign exchange]. The move was clearly designed to deliver maximum impact and reflects the shared desire from both Washington and Tokyo that USD/JPY does not sustain a move through 160.”
With the Fed cutting interest rates on the dollar, and the Bank of Japan raising rates, the scene is set for both governments to prevent the dollar gaining against the yen, Turner says. Right on cue, the yen fell another 1% against the dollar yesterday.
The dollar has been broadly weaker this year, falling 0.59% against a basket of foreign currencies for the year-to-date.
The challenge for the White House—assuming a weak dollar is key to its economic plans—will be sustaining the dollar’s weakness in the longer run. Currently, the U.S. economy is fairly robust and unemployment is low, a scenario that implies the dollar is likely to strengthen.
The S&P 500 was up 0.56% yesterday and is now back in positive territory for the year.
That’s why the Fed’s minutes are being interpreted by many this morning as being relatively hawkish—meaning that the Federal Open Market Committee is less enthusiastic about cutting interest rates further. “Almost all members decided to maintain the target range for the federal funds rate at 3-1/2 to 3-3/4%,” the minutes say. That might set the stage for a rally in the dollar. The dollar rose 0.58% yesterday and is up 0.71% over the last five days.
Nonetheless, ING’s Turner thinks the ‘sell dollar’ sentiment will prevail. “We think the market’s sell dollar rally mentality remains,” he told clients.
Here’s a snapshot of the markets this morning:
- S&P 500 futures were down 0.33% this morning. The index closed flat up 0.56% in its last session.
- STOXX Europe 600 was down 0.63% in early trading.
- The U.K.’s FTSE 100 was down 0.76% in early trading.
- Japan’s Nikkei 225 was up 0.57%.
- China’s CSI 300 is closed for Chinese New Year.
- The South Korea KOSPI was up 3.09%.
- India’s NIFTY 50 was down 1.41%.
- Bitcoin declined to $66.8K.
