Matthew Lynn is a financial columnist and author. He writes for the Daily Telegraph and the Spectator in London.
He was saving the bond market. Or laying the groundwork for a new currency system. Or rescuing a major bank from imminent collapse. The internet has plenty of wild theories about why Treasury Secretary Scott Bessent intervened in currency markets to prop up the value of the Japanese yen on Friday after it hit a 40-year low. Yet the real explanation is probably a lot simpler — and, unfortunately, a lot more worrying.
The intervention was the first time in nearly three decades that the United States stepped in to support the yen. The “coordinated foreign exchange actions countered disorderly yen movements,” Bessent said in a social media post. President Donald Trump told reporters that Japan “wanted a little bit of help. And we’re always there for Japan.” Traders can still bet against the yen if they want to. But both the treasury secretary and the president made it clear that shorting the currency would be taking on the financial firepower of the U.S., and not many have the stomach for that.
Financial pundits were quick with a range of explanations. The most obvious was that Bessent was worried that Japan — the largest foreign holder of U.S. Treasury bonds — might have to sell off its holdings to defend the yen, which would raise American interest rates. Alternatively, maybe Bessent was plotting to create an Asian currency pact to check Chinese attempts to replace the dollar; or taking preemptive action to prevent the collapse of a major bank overexposed to the yen; or preparing to switch to crypto as the official U.S. currency; or just locking down the markets ahead of an announcement that aliens have been in touch and will be landing next Tuesday.
Most of the scenarios have an element of plausibility. It would certainly be a problem for the U.S. if Japan sold its Treasury bonds. The Chinese determination to replace the dollar is real and needs to be countered. A bank or hedge fund may well hold large positions in yen, and the institution could have been in trouble if the currency’s value kept on falling.
But there is a more straightforward explanation. Under Bessent’s control, the Treasury Department has developed a taste for the currency market. Last year, the Treasury established a $20 billion currency swap line with Argentina when the government faced financial pressure. The former Hungarian prime minister Viktor Orbán claimed the White House promised to support Hungary’s forint if the currency came under attack from speculators.
Bessent is a hedge fund guy. More specifically, he is a Soros Fund Management guy. He worked there through the Asian financial crisis of the late 1990s, and the firm’s bet against the British pound earned $1 billion a few years earlier. Big currency bets are what he does best. In effect, he is playing the currency market because, well, that is what you do.
We all know the feeling from our own working lives. When you make the finance guy CEO, he nails down the accounts, and when you make the marketing manager the boss, she launches lots of new advertising campaigns. In the unlikely event the president named me treasury secretary, I would while away the day penning elegant op-eds on the future of the financial system. People do what they feel comfortable doing. Bessent trades currencies because that’s his comfort zone.
The moves might be profitable. As it turned out, the U.S. made money by dabbling in the Argentine peso. Bessent boasted that it generated “tens of millions in profit,” making it “an America First homerun deal.” The yen trade might well turn into another “homerun deal.” We will see.
Here is the problem, however. The Treasury Department can’t be run like a hedge fund. To start with, it does not exist to chase financial gains. Its core objectives should be to maintain financial stability and protect the value and role of the dollar. There may be times when those interests turn a profit, but that will only happen rarely. Next, making money on a trade is great, but as anyone on Wall Street will tell you, there will be days when you lose money. When that happens to the Treasury Department, American taxpayers won’t be too happy. Finally, making large trades distorts markets. The dollar as the global reserve currency is a huge asset for the U.S. government. But, over time, other countries won’t want to rely on the dollar if the U.S. is using it to pick winners and losers.
In fairness, if you did want to run the Treasury Department like a hedge fund, Bessent would probably be the best person to hire. The yen trade might well work out. But this is a very dangerous game.
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