Mike Dolan: The G7's historic role in FX is undermined by the action between Japan, US and ROI

The absence of full G7 firepower in last week's joint U.S. and Japanese intervention to support yen was as telling as the actual operation. The coordinated global show of force has been replaced by a bilateral transaction, reducing the effectiveness of the effort and lowering hopes for a "grand bargain" in exchange rates. The timing and rationale for the joint yen purchase have been the subject of reams?of analysis. Scott Bessent, the U.S. Treasury secretary and Satsuki Katayama, his Japanese counterpart have both spoken out publicly on this move and its many nuances and intentions. The?yen is still holding on to much of its initial boost amid fears over possible repeat interventions. Currency markets are left with more questions than answers. Will Bank of Japan rate increases reinforce the salvo? Why was Washington concerned about the impact of a massive Japanese interference on the U.S. Treasury Bond Market? Japan, as the largest foreign owner of U.S. Treasuries at that time, may have been forced to liquidate its Treasury holdings in order to fund an extensive, long-term dollar selling campaign. Bessent might have calculated that U.S. involvement -- the Federal Reserve providing Japan dollars through repo transactions, while the U.S. was selling euros instead of dollars -- would lower that risk. If the goal was to curb excessive weakness and speculation - a goal that is likely shared by the G7 countries - then why wasn't the entire club involved to give it more weight? This is a stark statement about the relationship within the G7 and the retreat away from multilateralism, especially in Washington and Tokyo. It even coincides with President Donald Trump’s 18-month retreat on?global military, diplomatic and trade alliances. The G7 round has been the catalyst for most coordinated exchange rate actions among major Western economies, excluding the famous Plaza and Louvre agreements of the 1980s that weakened and stabilised the dollar.

The last coordinated intervention on the yen currency was to sell it after its dangerously inflated in response to the devastating earthquake and tsunami of 2011. All G7 countries played a role in this. The last time the G7 nations bought yen together was during the Asian Crisis in 1998. This was a bilateral exchange with Washington that took place shortly before the formation of the euro in 1999. The three G7 central bankers acted in concert to provide liquidity after the 2001 9/11 market shocks.

G7 SHOCK and AWE The euro?s early troubles are perhaps best example of non-yen. The European Central Bank intervened late in 2000 due to steep, persistent losses against both the dollar and the yen following the formation of the euro in 1999. This campaign began as well with a collective G7 Thunderbolt. Joint euro purchases allowed the ECB continue, and eventually draw a line beneath the new common currency. Other G7 members were conspicuously absent last week, particularly as the U.S. was the only one involved in the operation. An ECB spokesperson refused to comment when contacted by despite a source who was familiar with events stating that the ECB and the Fed had spoken about this matter. This doesn't indicate much coordination and the communication seems to have been after the event. The International Monetary Fund has also not made a statement about the issue, which is responsible for monitoring exchange rate policies and external imbalances. The French-led G7 summits this year and the finance meetings did not mention exchange rate coordination, except for brief references to the standard language about excessive volatility that has been embedded in communiqués since 2017. The Evian G7 Summit conclusions in June on the global economy and trade imbalances stated that "we also reaffirm existing G7 exchange rates commitments." It didn't seem like the leaders - or their finance chiefs a month earlier - spent much time discussing the issue. Even though the yen had already reached a 40 year low. Trump's administration, which rejects multilateralism openly, seems to prefer to do things their way: through one-to-one negotiations rather than global agreements. Perhaps Prime Minister Sanae Takaichi's Japan sees it similarly. Both are bound by the bilateral trade agreements that were produced by Trump's unilateral policy last year. Japan's countervailing promise of half a trillion dollars worth of U.S. investments to secure its tariff ceasefire may have even contributed to the excessive pressure on the Japanese yen.

Bessent explained that there was also a local angle. China's currency, the yuan, is the most important, but is outside of the G7's jurisdiction. This will only become a collective issue when the G20 meets in Miami,?in December. The G7 big guns have either ceased to speak on foreign exchange or they may be absorbed by the currency markets over time. Markets are now wondering if Washington's dislike of multilateralism will continue beyond the current administration, or if it will lead to increased or decreased currency volatility.

The opinions expressed are those of Mike Dolan a columnist at. This column is great! Check out Open Interest, your new essential source for global financial commentary. Follow ROI on LinkedIn and X. Listen to the Morning Bid podcast daily on Apple, Spotify or the app. Subscribe to the Morning Bid podcast and hear journalists discussing the latest news in finance and markets seven days a weeks.

(source: Reuters)