Bessent warns yen at 160 risks forced unwinds, higher U.S. costs

U.S. Treasury Secretary Scott Bessent warned that disorderly yen markets could trigger forced unwinds of carry-trade positions, pushing the dollar past 160 yen and threatening higher borrowing costs for American households and businesses.

"Disorderly yen markets can trigger forced unwinds, which could destabilize global markets and ultimately raise borrowing costs for American families and businesses," Bessent said in an Aug. 27 letter to Sen. Elizabeth Warren, the top Democrat on the Senate Banking Committee.

The letter, released on X on Friday, confirmed the Treasury used existing Exchange Stabilization Fund foreign-currency assets to buy yen in late July — the first U.S. intervention to support the yen since 1998. Japan spent a record $96.4 billion in the past month to support its currency. The dollar topped 160 yen in New York trading on Friday for the first time since the intervention, as expectations for an early Federal Reserve rate hike increased.

Japan is the largest foreign holder of U.S. government securities, making yen stability a direct concern for Treasury yields. If disorderly moves force leveraged investors to unwind carry-trade positions, the resulting selling pressure could push yields higher and raise financing costs across the U.S. economy.

First Yen-Buying Intervention Since 1998

Bessent declined to disclose the scale of yen purchases, saying only that the Treasury "exchanged existing Exchange Stabilization Fund foreign-currency assets for yen" in accordance with the law governing the fund. The ESF statute "expressly authorizes the secretary, with presidential approval, to deal in foreign exchanges in support of orderly exchange agreements," he wrote.

"No credit was extended to Japan," Bessent said. "Japan owes Treasury nothing. There is therefore no risk that Japan will fail to repay a debt that does not exist."

The intervention marked a rare foray into currency markets by U.S. authorities, who have historically preferred to let markets determine the dollar's value. The last time the Treasury bought yen was in 1998, when the U.S. joined Japan in coordinated action to support the currency during the Asian financial crisis. That operation helped stabilize the yen after it had fallen sharply against the dollar, and the currency recovered significantly in the months that followed.

Carry-Trade Vulnerability

The yen's slide below 160 per dollar on Friday — the first time since the intervention day — shows the challenge facing policymakers. The currency has surrendered some of the gains from the late-July operation, and the dollar's renewed strength reflects growing expectations that the Federal Reserve will raise rates sooner than previously anticipated.

Warren had pressed Bessent to provide the analysis behind using the Treasury's ESF for the yen operation. Treasury watchers had connected the unusual move with concerns about heading off any rise in Treasury yields, given Japan's position as the largest foreign holder of U.S. government securities.

The risk is that a disorderly yen depreciation forces leveraged investors to unwind carry-trade positions — borrowing in yen at low rates to invest in higher-yielding assets elsewhere. Such forced unwinds could trigger a cascade of selling across global markets, pushing up U.S. Treasury yields and raising borrowing costs for American families and businesses.

The yen carry trade has been one of the most crowded trades in global markets, with investors borrowing in yen to fund purchases of higher-yielding assets from U.S. Treasuries to emerging-market debt. A sharp yen appreciation would force these investors to buy back yen to cover their positions, potentially triggering a broader deleveraging across asset classes. Equity markets would likely feel the impact first, as leveraged funds liquidate stock positions to meet margin calls, followed by corporate credit as risk premiums widen.

If the yen continues to weaken past 160, the Treasury may face renewed pressure to intervene again. If it strengthens sharply, the forced unwinds Bessent warned about could materialize. Either scenario carries risks for U.S. borrowing costs, leaving the Treasury walking a narrow path between currency stability and market disruption.

This article is for informational purposes only and does not constitute investment advice.