LIVE: US dollar crashes after Trump admin sidestepped it in surprise yen intervention for Japan

The U.S. dollar weakened sharply against the Japanese yen on Monday after U.S. President Donald Trump and Japan’s finance minister confirmed that both countries had intervened in the currency market.

The greenback was previously trading above 163 yen, touching highs not witnessed in some 40 years, before the past week-end, when it started dropping below 160 yen amid growing suspicions of government intervention.

The greenback fell to around 155.20 yen following the announcement of the intervention early Monday and then recovered to touch 156.75 yen by late Monday afternoon in Tokyo. That was well below the high from last week.

While the weakening of the yen has been luring millions of bargain hunters to Japan, it has increased the cost of imports.

Japan relies heavily on imports, and the weaker currency has pushed up domestic prices. High oil costs have added to the pressure, leaving Japanese Prime Minister Sanae Takaichi’s government facing growing demands to ease the cost-of-living squeeze.

Louise Loo, head of Asia economics at Oxford Economics, said inflation pressure in Japan was “possibly one of the key reasons” Washington agreed to take part. Louise said the U.S. also had its own interests to protect.

“There is a self-preservation element here. Volatile markets driven by potentially fiscally-aggressive policies from Japan could extend to the U.S. Treasury markets, destabilizing the dollar.”

Louise said the focus from Tokyo and Washington on the Federal Reserve’s standing FIMA repo facility suggested both sides wanted to avoid forced Treasury sales. The facility allows foreign central banks to obtain dollar liquidity without selling their U.S. government bond holdings outright.

Japan’s finance ministry said Monday that it plans to use the FIMA facility in future interventions. Masahiko Loo, senior macro strategist at State Street, said that message “may be bigger than the intervention itself.”

Masahiko stated that Washington’s worries may not end with the yen. A further depreciation of the currency will only spur the selling of Japanese bonds, increasing interest rates and creating volatility in the international bond market. This is even more critical when both Japan and America are grappling with high long-term interest rates.

“Highlighting access to the Fed’s FIMA repo tells markets Japan can raise dollar liquidity without selling Treasuries … addressing concerns that MOF intervention could pressure U.S. funding markets through short-end UST sales,” Masahiko said. “It’s an attempt to maximize the signaling effect and get the biggest bang for the buck with the tools already available.”