Were Wall Street fooled? Media exposes the truth behind Bessent's "intervention in the yen": the actual scale may have been only a mere $500 million!

The US Treasury's intervention in the yen exchange rate in July this year may be far smaller than the market previously expected, with the actual scale possibly only around $500 million, a far cry from the previous market estimate of $5 billion to $10 billion.

According to an analysis by Alphaville, a column under the Financial Times, a note on Bessant's desk previously indicated that the US Treasury's intervention might have been between $5 billion and $10 billion . However, researchers tracking the US Treasury's weekly foreign exchange reserve data and adjusting for valuation effects caused by exchange rate fluctuations found that in the week following the intervention, euro holdings decreased by approximately $495 million, while yen holdings increased by approximately $502 million, both figures pointing to an intervention of approximately $500 million.

This calculation did not come directly from the Ministry of Finance's disclosure, but rather it was derived by inferring the scale of intervention through changes in foreign exchange reserve assets. Since the July financial report of the Exchange Stabilization Fund (ESF) did not explicitly disclose the relevant positions, researchers instead looked for traces of asset changes left by the intervention in weekly data and adjusted them in conjunction with exchange rate fluctuations.

If this estimate holds true, then the scale of this intervention is even less than a fraction of the US Treasury's current maximum available euro assets of approximately $26.3 billion. This also means that the US Treasury's ability to directly influence exchange rates through foreign exchange instruments may not be as strong as the market previously imagined.

Statutory disclosure failed to solve the mystery.

Under U.S. law, the Treasury Department is required to publish financial data related to the Exchange Stabilization Fund (ESF) within a specified period after the end of each quarter. According to this timeline, August 30th should have been a crucial point for the market to confirm the scale of this intervention.

However, after reviewing the July ESF financial report, Alphaville found that the report notes did not mention the euro/yen cross positions.

If the Ministry of Finance intervenes using euro-yen forward contracts, it should, according to regulations, disclose "all signed and renewed contracts and anticipated liabilities" in Note 9 of the report. However, this information is absent from this note and other notes.

This leaves two possibilities: either the Treasury Department missed making the relevant disclosures, or there are rules that are not yet known to the public, allowing contracts signed on the last trading day of July to be exempt from the monthly report. Alphaville has sought a response from the Treasury Department but has not yet received one.

The weekly foreign exchange reserve report provides cross-validation.

After the ESF's financial report failed to provide a clear answer, researchers turned to tracking the weekly foreign exchange reserve data released by the U.S. Treasury Department. This data covers the value of euro and yen deposits and securities held by the ESF and the Federal Reserve Open Market Account (SOMA).

In addition to the aforementioned asset changes, Alphaville also uses the daily closing exchange rate from the Federal Reserve Economic Database (FRED) for valuation adjustments. However, since the closing exchange rate is not the actual transaction price, this method is inherently subject to some error.

To further verify the calculation results, Alphaville conducted cross-validation with Brad Setser, former Deputy Assistant Secretary of the U.S. Treasury and an expert in official sector finance, who also provided similar estimates.

Intervention tools determine information transparency

The specific tools used to carry out the intervention are also crucial in determining whether the outside world can reconstruct the scale from official data.

If the Treasury intervenes through euro-yen forward contracts, it can access the more liquid foreign exchange market without having to sell bonds to raise funds, making its operations more flexible. However, the relevant positions should, in principle, be disclosed in the ESF financial report.

The situation is different if spot market intervention is used. Since the settlement date for spot transactions completed on July 31 is after July 31, the related position changes will not be immediately reflected in the July ESF report, making it difficult for the monthly report to directly capture this transaction.

Based on the clues currently available, this intervention is more likely to be carried out through the spot market, and its scale is approximately $500 million.

If this assessment is ultimately confirmed, then Bessant's intervention will be significantly less forceful than the market had previously anticipated, which also means that the market may need to reassess the U.S. Treasury's ability and willingness to continuously and extensively influence exchange rates through the Exchange Stabilization Fund.

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