US Treasury’s Bessent warns yen volatility risks spillover to global markets

 U.S. Treasury Secretary Scott Bessent warned that disorderly volatility in the Japanese yen could trigger forced position unwinds with the potential to destabilize global financial markets and push up borrowing costs for American households and businesses, according to official correspondence released on Friday.  

According to Reuters, Bessent outlined the risks in an Aug. 27 letter addressed to Democratic Senator Elizabeth Warren, which was posted on his X account a day later. The response came after Warren requested a detailed explanation of Washington’s joint currency intervention with Tokyo late last month.

The publication of the letter coincided with renewed downward pressure on the Japanese currency despite market expectations of potential near-term rate hikes by the Bank of Japan.

Defending the decision to partner with Tokyo to counter disorderly declines, Bessent noted that the U.S. Treasury conducted the intervention by exchanging foreign-currency assets held within its Exchange Stabilization Fund (ESF) for yen.

"The best-managed crisis is the one that never happens," Bessent wrote in the letter.

He drew a direct comparison to previous Treasury stabilization efforts, citing the emergency reserve’s historical role in international markets.

"The same principle was at work in Argentina, where Treasury used the Exchange Stabilization Fund to stabilize Argentina in a moment of acute, short-term illiquidity and to prevent the problem from becoming a broader regional crisis," Bessent said.

The ESF serves as an emergency reserve managed directly by the U.S. Treasury to maintain stability across foreign-exchange and domestic financial markets. Last year, the Treasury drawn on the fund to support Argentina’s peso market and establish a $20 billion currency swap facility to stabilize the currency.

Japan and the United States executed their rare joint yen-buying operation on July 31 to halt a sharp selloff in both the yen and Japanese government bonds, aiming to prevent systemic spillovers into broader global asset classes.

Although the intervention initially helped the yen rally from a 40-year low near 164 per dollar up to 155.20, the currency has since surrendered those gains and drifted back toward the 160 mark.

The yen briefly dipped below 160 per dollar on Friday - a level widely monitored by market participants as a key trigger for potential central bank intervention - after remarks from Federal Reserve Chair Kevin Warsh reignited expectations of near-term U.S. interest rate hikes.