Biden Providing Political Cover for Japanese Yen Intervention

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In a move reminiscent of the 1985 Plaza Accord, the Biden administration, alongside its Asian allies, appears to be laying the groundwork for a coordinated intervention effort aimed at stemming the strength of the US dollar.

Following discussions at the International Monetary Fund's spring conference in Washington, finance officials from the United States, Japan, and South Korea released a joint statement pledging to closely monitor foreign exchange market developments.

Treasury Secretary Janet Yellen, Japanese Finance Minister Shunichi Suzuki, and South Korean Finance Minister Choi Sang-mok expressed their commitment to consultation in line with existing G20 commitments. The statement specifically addressed the concerns of Japan and South Korea regarding the recent sharp depreciation of their respective currencies, the Japanese yen, and the Korean won.

Karl Schamotta, Chief Market Strategist at Corpay, drew parallels between the current situation and the conditions preceding the Plaza Accord of 1985. "The dollar’s strength is drawing comparisons to the conditions that prevailed ahead of the 1985 Plaza Accord, in which the United States worked with its allies to drive the greenback lower," he noted.

However, Schamotta believes that a repeat of the Plaza Accord is unlikely. "We don’t think a repeat is likely. At other historical junctures, the Biden administration might have valued the export-flattering effects of a depreciating dollar enough to support a US-led intervention effort, but in today’s inflation-inflected election cycle, the political risks are likely too great," he remarked.

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Instead, the Biden administration appears to be taking a different approach. "Instead, American officials seem content to give Japanese and Korean officials the political cover necessary to work in concert with one another against further exchange rate depreciation," Schamotta explained.

The move reflects a delicate balancing act for the Biden administration, which must consider the economic implications of a strong dollar against the backdrop of inflationary pressures and political considerations in an election year. With the promise of continued consultation and cooperation among key stakeholders, the stage is set for potential intervention efforts to manage currency fluctuations in the months ahead.