The Federal Reserve confirms that it complied with the White House’s request for an unusual ‘rate check’, causing the dollar to weaken against foreign currencies

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Yesterday, the U.S. Federal Reserve confirmed that its trading desk carried out an assessment on the exchange rate between the U.S. dollar and the Japanese yen on behalf of the White House earlier this year. This action is frequently seen as a precursor to actively intervening in currency markets. In this instance, it implies that the U.S. Treasury aimed to strengthen the yen against the dollar (or, conversely, weaken the dollar against the yen).

Indeed, this is precisely what occurred in the foreign exchange markets on January 23 of this year. The dollar was trading at ¥158.50 but then suddenly dropped to ¥152.45 by January 27 – a relatively significant movement for such major international currencies.

In the minutes of its last meeting, the Fed stated that private markets had anticipated the dollar to continue weakening this year. However, the U.S. economy had performed so well that those expectations had “moderated quite a bit.” The dollar was gradually gaining strength against the yen, approaching ¥160.

But then, U.S. Treasury officials asked the Fed’s trading desk to obtain a quote for a substantial purchase of yen – a move that would weaken the dollar again and drive up the value of the Japanese currency. As a result, “the dollar…depreciated significantly after reports that the Desk had made requests for indicative quotes, known as ‘rate checks,’ on the dollar – yen exchange rate. The manager noted that the Desk had requested those quotes solely on behalf of the U.S. Treasury in the Federal Reserve Bank of New York’s capacity as the fiscal agent for the U.S.”

The implication of this move is that the White House desires the dollar to remain weak compared to foreign currencies. A weak dollar means that U.S. goods and services are relatively inexpensive for foreign businesses and investors. It is a means of boosting U.S. exports and foreign investment in America.

ING analyst Chris Turner was surprised by the move. “What also caught our attention in the minutes was the Fed’s full disclosure regarding the USD/JPY rate check. The minutes confirmed that the New York Fed did conduct a rate check in USD/JPY on behalf of the US Treasury and in its role as the fiscal agent of the US. This likely happened at 5:00 pm London time on Friday, January 23, when USD/JPY was trading around 157,” he told clients this morning.

“Such an event is extremely rare in foreign exchange markets and indicates a more proactive White House when it comes to FX [foreign exchange]. The move was clearly designed to have the maximum impact and reflects the shared wish of both Washington and Tokyo that USD/JPY does not sustain a move above 160.”

With the Fed reducing interest rates on the dollar and the Bank of Japan increasing rates, the stage is set for both governments to prevent the dollar from strengthening against the yen, Turner says. Right on cue, .

The dollar has generally been weaker this year, falling 0.59% against so far this year.

The challenge for the White House – assuming a weak dollar is crucial to its economic plans – will be to maintain the dollar’s weakness in the long term. Currently, the U.S. economy is fairly strong and unemployment is low, a situation that suggests the dollar is likely to strengthen.

The S&P 500 rose 0.56% yesterday and is now back in positive territory for the year.

That’s why many are interpreting the Fed’s minutes this morning as being relatively hawkish – meaning that the Federal Open Market Committee is less eager to cut interest rates further. “Almost all members decided to keep the target range for the federal funds rate at 3 – 1/2 to 3 – 3/4%,” . That might set the stage for a rally in the dollar. The dollar rose 0.58% yesterday and is up 0.71% over the last five days.

Nevertheless, ING’s Turner believes the ‘sell dollar’ sentiment will prevail. “We think the market’s mentality of selling the dollar for a rally remains,” he told clients.

Here’s a snapshot of the markets this morning:

  • S&P 500 futures were down 0.33% this morning. The index closed flat with a 0.56% increase in its last session.
  • STOXX Europe 600 was down 0.63% in early trading.
  • The U.K.’s FTSE 100 was down 0.76% in early trading.
  • Japan’s Nikkei 225 was up 0.57%.
  • China’s CSI 300 is closed for Chinese New Year.
  • The South Korea KOSPI was up 3.09%.
  • India’s NIFTY 50 was down 1.41%.
  • Bitcoin declined to $66.8K.