The Dollar Takes Repeated Hits and Potential Intervention May Lower Its Value

SadaNews - The prospect of the United States effectively joining Japan in intervening in the foreign exchange market represents the latest in a series of pressures faced by the currency on multiple fronts.

The dollar fell against most major currencies while the yen surged, and gold reached record levels on Monday as investors discussed how any joint intervention to support Japan could further undermine confidence in the greenback.

The U.S. currency experienced its worst week since May, as unexpected policy-making in Washington destabilized financial markets.

Possible Intervention to Lower the Dollar

For many dollar watchers, signs of American support for strengthening the yen reopen the discussion about a potential coordinated intervention in the currency market to push the dollar down against major trading partners.

Some believe such an agreement could help U.S. exporters compete with rivals like China and Japan, although it raises questions about the long-term value of the global reserve currency.

In the United States, the Treasury Department sets currency policy and officially announces any interventions, which are typically executed by the Federal Reserve as its agent.

New York's Participation Could Boost the Yen's Rise

Gareth Berry, a strategist at Macquarie Group, said, 'If the New York Federal Reserve chooses to participate, it would boost the yen's rise and not just for symbolic reasons.'"

He added, 'Japan has a lot of dollars to sell, but the New York Federal Reserve has an unlimited quantity. This would also be interpreted as a signal that Trump wants a generally weaker dollar.'

The Bloomberg Spot Dollar Index has fallen by more than 9% since the beginning of last year.

Various Pressures on the Dollar

Concerns related to the independence of the Federal Reserve, and expectations that Jerome Powell's successor might be influenced by President Donald Trump to quickly lower interest rates, have pressured the U.S. currency, just as the rising fiscal deficit, fears of extravagance, and widening political polarization have.

The discussion about the possibility of a currency agreement was revived on Friday after traders reported that the New York Federal Reserve had contacted financial institutions to inquire about the yen's exchange rate.

Wall Street saw those inquiries as a potential prelude to Japan's intervention with U.S. support.

Rare Interventions to Support the Yen

Coordinated interventions to support the yen are rare, having occurred once in 1998, and once during the "Plaza Accord" in 1985, which was an agreement between the U.S., France, Japan, the UK, and West Germany at that time to weaken the dollar.

Early last year, analysts discussed the possibility of reaching what is known as the "Mar-a-Lago Agreement," after a research paper prepared by Stephen Miran, an economist in the Trump administration and current Fed Board member, on intentionally weakening the dollar.

Anthony Doyle, chief investment strategist at Pinnacle Investment Management, stated, 'When the U.S. Treasury starts reaching out, it is usually a sign that things have surpassed being just a normal story in the forex market.' And 'the prospect of coordinating action sets limits on the dollar-yen pair's rise and makes dollar buying positions more vulnerable.'

The yen boosted its gains by more than 1% in Asian trading on Monday, while the Bloomberg Dollar Index dropped by 0.4%, continuing its slide from last week's 1.6% drop. This occurred after Trump hinted at imposing tariffs on Europe following his abrupt desire to buy Greenland.

On Saturday, he threatened to impose a 100% tariff on Canada if it reached a trade deal with China.

U.S. dollar sell-offs will accelerate as foreign investors increase their hedging ratios against the currency, and after the yen's downward trend was halted thanks to officials' actions.

Gold Soars While the Dollar Dives

On Monday, gold prices surpassed $5000 an ounce for the first time. Precious metals are experiencing record highs amid intensified geopolitical risks that have fueled the so-called 'currency debasement trade,' as investors move away from paper currencies.

In Asia, several currencies reached notable levels, with the Singapore dollar hitting its highest level since 2014, while the Malaysian ringgit reached its strongest levels against the U.S. dollar since 2018.

The Korean won jumped by more than 1% after U.S. Treasury Secretary Scott Pysent provided rare verbal support for the currency earlier this month.

Divided Views on the Trump Administration's Intentions

The debate continues over whether the Trump administration truly seeks to weaken the dollar's value. Pysent stated last year that the U.S. still follows a "strong dollar" policy, dismissing concerns about the dollar's status as a primary global currency. Pysent clarified in a Bloomberg Television interview at that time: "The dollar's value is unrelated to a strong dollar policy."

Daniel Baiza, senior vice president at Frontclear, believes any signs of coordinated intervention could affect investor confidence in the dollar. He said, 'The most important signal is coordination in policies.'

"If markets interpret the coordination as a willingness to tolerate looser global dollar conditions, particularly with easing policies from the Fed, it could bolster a short-term drop in the dollar."