Why Is the U.S. Treasury Intervening in Currency Markets and What Does It Mean for Investors?

The Japanese yen recently hit a 40-year low against the dollar.

The recent intervention turns out to be good for U.S. stocks, too.

Unlike many nations, the U.S. government has historically tried to avoid intervening in currency markets.

The dollar floats freely on global exchanges, and the U.S. Treasury Department generally likes to keep it that way. Occasional utterances by Treasury Secretaries, beginning with Robert Rubin during the Clinton Administration, that the U.S. has a "strong dollar policy" are purely rhetorical, meaning the rhetoric is the entire policy.

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But once in a while, Uncle Sam deems it necessary to buy or sell other nations' currencies when their exchange rates reach extreme and unhealthy levels. That's exactly what happened in recent days. And it has consequences for U.S. investors, too.

Late last week, the U.S. and Japanese governments teamed up to defend the yen, which recently hit a four-year low against other major world currencies. It was the first such intervention in 15 years.

The yen has been weakening against the dollar for years and hit a 40-year low in July. That's partly due to market expectations that the Federal Reserve will have to raise rates to counter inflation resulting from the Iran war-related oil shock. Also, the Bank of Japan has held its benchmark interest rate low for years. Global capital tends to flow to countries with higher interest rates, so currency traders have been selling the yen to buy the dollar, pushing the Japanese currency lower.