Fed confirms it obeyed White House request for an unusual ‘rate check,’ weakening the dollar against foreign currencies

The U.S. Federal Reserve confirmed yesterday that its trading desk did conduct a rare “rate check” on the exchange rate between the U.S. dollar and the Japanese yen on behalf of the White House earlier this year. The move is often regarded as a precursor to actively intervening in currency markets. In this case, the implication would be that the U.S.

Treasury wanted to strengthen the yen versus the dollar (or vice versa, weaken the dollar versus the yen). Indeed, that is exactly what happened on the foreign exchange markets on Jan. 23 of this year. The dollar had been trading at ¥158.50 but then collapsed suddenly to ¥152.45 by Jan. 27—a relatively sharp move for such large international currencies.

In the minutes of its last meeting, the Fed said that private markets had expected the dollar to continue weakening this year, but the U.S. economy had done so well that those expectations had “moderated quite a bit.” The dollar was slowly gaining strength versus the yen, approaching ¥160. But then, the Fed said , U.S.

Treasury officials asked the Fed’s trading desk to get a quote for a significant purchase of yen—a move that would weaken the dollar again and bid up the Japanese currency. As a result, “the dollar … depreciated markedly 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 role as the fiscal agent for the U.S.” The implication of the move is that the White House wants the dollar to remain weak compared with foreign currencies. A weak dollar means U.S. goods and services are cheap, by comparison, for foreign businesses and investors.

It’s a way of boosting U.S. exports and foreign investment into America. ING analyst Chris Turner was shocked by the move. “What also stood out to us in the minutes was the Fed’s full disclosure on the USD/JPY rate check. The minutes confirmed that the New York Fed did check rates in USD/JPY on behalf of the U.S. Treasury and in its role as the fiscal agent of the U.S. This likely happened at 5 p.m.

London time on Friday, 23 January, when USD/JPY was trading around 157,” he told clients this morning. “Something like this is extremely rare in foreign exchange markets and is a sign of a more activist White House when it comes to FX [foreign exchange].

The move was clearly designed to deliver maximum impact and reflects the shared desire from both Washington and Tokyo that USD/JPY does not sustain a move through 160.” With the Fed cutting interest rates on the dollar, and the Bank of Japan raising rates, the scene is set for both governments to prevent the dollar gaining against the yen, Turner says.

Right on cue, the yen fell another 1% against the dollar yesterday . The dollar has been broadly weaker this year, falling 0.59% against a basket of foreign currencies for the year to date. The challenge for the White House—assuming a weak dollar is key to its economic plans—will be sustaining the dollar’s weakness in the long run. Currently, the U.S.

economy is fairly robust and unemployment is low, a scenario that implies the dollar is likely to strengthen. The S&P 500 was up 0.56% yesterday and is now back in positive territory for the year.   That’s why the Fed’s minutes are being interpreted by many this morning as being relatively hawkish—meaning that the Federal Open Market Committee is less enthusiastic about cutting interest rates further.