The United States sold a portion of its euros in order to rescue the Japanese yen. What really annoyed the officials at the European Central Bank was not the sale of euros, but the fact that the United States did it without even giving any prior notice.
According to a report by Reuters on August 30, several European officials attending the Jackson Hole Global Central Banks Annual Meeting said they are increasingly worried that the United States is breaking with the long-established practice of financial policy cooperation among major economies.
The spark was ignited on August 1. At that time, the Japanese yen was experiencing severe fluctuations. Japan intervened in the foreign exchange market, and the U.S. Treasury Department also joined in a rare act by purchasing yen through the Foreign Exchange Stabilization Fund. U.S. Treasury Secretary Bennet later confirmed that in this transaction, the United States sold euros in exchange for yen.
The problem is that Europe was not aware in advance that its currency would be involved in this situation.
According to the long-established practice of major central banks and financial authorities in Europe and America, if a country intends to carry out actions that may significantly affect another major currency, communication is usually initiated in advance. A European official told Reuters that this is “annoying,” as normally, “one would always make a call first.”
He further complained: “America wants to do whatever it wants.”
This statement may be more important than this foreign exchange operation itself.
Because the amount of euros that the United States sells is not enough to shake the international status of the euro; what Europe is truly worried about is that the set of "unwritten rules" that have supported the global financial system over the past few decades are becoming less reliable.
The United States has another explanation for this. U.S. officials say that the intervention was intended only to prevent chaotic fluctuations in the Japanese yen and to maintain global financial stability, and not aimed at Europe. Besent also interpreted the sale of the euro as a “reallocation of resources”. Some European officials also believe that this action is quite rare, and it’s possible that there was no prior notice, just negligence.
But the euro's instability is not only due to the yen.
On August 19, the U.S. Treasury announced that it would double the size of the repurchase program for 10- to 30-year long-term government bonds starting from September 9. The maximum single transaction limit would be increased from $2 billion to at least $4 billion. The Treasury said this move was intended to improve the liquidity of the long-term government bond market.
However, officials from the U.S. Treasury later stated that the Treasury is “very concerned” about the decline in long-term yields, as current yields have already exceeded what they consider to be a “reasonable value”. This has caused some people at the European Central Bank to worry that the U.S. government is increasingly intervening in exchange rates and long-term interest rates, which should be determined by markets and central banks.
A deeper sense of unease points towards the "nuclear button" of the US dollar system - the mechanism of dollar liquidity swaps.
After the financial crisis in 2008, the Federal Reserve established permanent dollar exchange arrangements with the European Central Bank, the Bank of Japan, the Bank of England, the Bank of Canada, and the Swiss National Bank. When there is a shortage of dollars in global markets, the Federal Reserve can supply dollars to local banking systems through these central banks, thereby avoiding financial institutions from having to sell assets on a large scale in order to obtain dollars.
The Federal Reserve itself has also stated that this mechanism can alleviate the global dollar financing pressures while protecting the financial stability of the United States.
It must be emphasized that there is no sign that the Trump administration is preparing to cancel or restrict the dollar swap mechanism. Moreover, the swap lines are determined by the Federal Reserve, and they cannot be directly closed by the Treasury Department or the White House. European officials who spoke with Reuters generally expect that the current situation will remain unchanged.
But it's worth noting that Europe is now starting to think about this issue.
The dominance of the US dollar is not simply because the United States can print dollars.
More importantly, over the past few decades, regardless of the conflicts that have arisen between Europe and America regarding trade, diplomacy, and even warfare, there has remained a relatively stable, technical, and predictable level of cooperation among major central banks. When crises arise, the Federal Reserve will provide dollars; it is prepared to intervene in other countries’ currencies, at least by communicating in advance. Financial stability issues do not easily become tools for political retaliation.
This expectation that “others believe the United States will not abuse its power” is itself one of the most important assets of the dollar system.
What Europe is currently worried about is precisely the crackling in this layer of credit.
Of course, the United States still possesses the world's largest financial market, the most important reserve currency, and dollar liquidity that other countries cannot replace in the short term. However, the most dangerous change in financial hegemony often does not occur when a country suddenly loses its dominance, but when allies begin to make preparations quietly.
Since the United States is becoming more and more likely to 'do whatever it wants', why not prepare a plan that doesn't rely entirely on the US before the next crisis arrives?
