A Reuters Open Interest newsletter

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist 

U.S. stocks rallied strongly and the Dow notched a record high close on Monday, boosted by solid manufacturing data and optimism around earnings and U.S.-Iran peace hopes, while the yen slumped to a three-month low after a historic bout of coordinated U.S.-Japanese intervention.    

In my column today, I look at the U.S. Treasury's activity in the FX market buying Japanese yen. Treasury's goals may have been conventional, but its methods weren't, and the timing may also speak to deeper concerns about the U.S. bond market.       

I’d love to hear from you, so please reach out to me with comments at jamie.mcgeever@thomsonreuters.com. You can also follow me at @ReutersJamie and @reutersjamie.bsky.social. 

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* Spend to defend

Japan is estimated to have spent almost $100 billion over a 48-hour period last week in FX intervention to support the yen - $36.6 billion on Friday, and $59 billion on Thursday. This follows a $73 billion spree in April-May this year, $36.8 billion in July 2024, $62.2 billion in April-May 2024, and $42.8 billion in October 2022.

Added together, Japan has spent around $310 billion over the past four years defending its currency. Has it 'worked'? That's subjective - absent that demand, the yen may well have sunk a lot lower than the 40-year low 164 per dollar recently. But we'll never know. That's a lot of dollars, and a chunk of it will have come from repo and other funding routes. But if it has prevented a much weaker and more volatile currency, Tokyo may see it as money well spent. 

* Bouncebackability

The word 'bouncebackability', popularized in British football parlance, describes a player or team's powers of resilience and ability to overcome often multiple setbacks. Wall Street is showing those characteristics, in spades, with the S&P 500 on Monday rebounding to within 0.5% of its record high and the Dow notching a new record high close.  

Investors are putting the recent chip rout to one side, and are taking their cue from the earnings picture, which could hardly be more bullish. The LSEG I/B/E/S Q2 annual consensus U.S. earnings growth forecast is now running at an astonishing 47.7%, virtually double what it was only a month ago. 

* Factory Whirl

Investors have had a few financial market wobbles to worry about recently - South Korean stocks, the global chip sector more broadly, the yen, and long-dated bonds, to name a few. But when it comes to the real economy, things have been much less volatile. If there's any background noise, it's the sound of global factories purring along rather nicely. 

The latest purchasing managers index data show U.S. factory activity expanded in July at its fastest pace in over four years, euro zone ouptut was the highest in four and a half years, and Japan's manufacturing PMI leaped to a 12-year high. There are weak spots, of course - China, India, UK - but overall, the AI capex boom is help to keep the world's manufacturers and producers busy. 

The U.S. Treasury's foray into the foreign exchange market on Friday to buy Japanese yen wasn't its first FX intervention and won't be its last. But it was one of its most unusual.

On Sunday, President Donald Trump's administration acknowledged it had intervened alongside Japan on Friday to prop up the flailing yen, which had weakened to a 40-year low of almost 164 against the dollar.

This was Washington's first intervention in the FX market since 2011, when, together with G7 partners, it sold yen to stop the Japanese currency from strengthening too much. Friday marked the U.S. Treasury's first yen-buying intervention since 1998, and its first FX intervention with just one other country, as opposed to action in coordination with multiple central banks, during that period.

But even if Washington’s aims were conventional - correcting what it deems to be excessive volatility and a fundamental exchange rate misalignment - the methods were anything but.