The U.S. Treasury "circumvented" the euro to support the yen, cleverly avoiding suspicions of local currency devaluation while maintaining a strong dollar.

According to strategists, the U.S. Treasury may be using euros instead of dollars to fund its yen-buying operations to avoid putting pressure on the domestic currency and to prevent the market from questioning its "strong dollar policy." According to informed sources, at least two major U.S. banks were contacted by the New York Federal Reserve last Friday (July 31) to confirm the exchange rate of the yen against the euro. Furthermore, reports from last week indicated that the New York Fed had sold euros and bought yen on behalf of the U.S. Treasury. The U.S. likely doesn't want to be seen by the market as selling off dollars, said David Forester, a senior strategist at Credit Agricole CIB in Singapore. The U.S. insists on a strong dollar policy and is reluctant to be interpreted as trying to gain a competitive advantage by devaluing its currency, which would contradict the G20 consensus on foreign exchange markets. This intervention through euro channels differs from the usual methods employed by the U.S.previously, the U.S. typically intervened directly using dollars. According to the latest three-year central bank survey by the Bank for International Settlements (BIS), the euro is the world's second-largest trading currency, accounting for about 29% of an estimated daily trading volume of $9.6 trillion in the global foreign exchange market as of April 2025. It looks bad for the U.S. Treasury to sell dollars directly, hence the switch to euros, said Jason Huang, a foreign exchange strategist at the Bank of New Zealand in Wellington. But the final effect is the samepositions will still need to be reallocated back to euros later, and there might still be dollar sales, albeit in a less transparent manner. Euro performance is relatively weak. Since Japan initiated its latest round of intervention on July 30, the euro has weakened against most G10 currencies, with a decline of about 4% against the yen. The Bloomberg Euro Index fell 0.2% on Monday (August 2), but remains close to its high since June 17. The primary goal of the intervention seems to respond to Japan's request to curb excessive yen depreciation, rather than to deliberately devalue the dollar, wrote JPMorgan strategists Junya Tanase and Patrick Locke in a client report. Additionally, since the "pure foreign exchange" portion (excluding gold and Special Drawing Rights) of U.S. foreign exchange reserves is mainly composed of euros and yen, this move can be seen as a cooperative effort to jointly suppress yen depreciation within the framework of reserve asset allocation, they added.