Foreign-exchange intervention has returned to the toolkit of the world’s leading economies. China has long managed the renminbi to resist unwanted appreciation. Now the United States has revived intervention as a geopolitical instrument, as it regularly did until the 1990s.
Europe cannot help but have a plan. Not because it ought to manipulate the euro, but because it remains institutionally unprepared for a world in which other powers increasingly deploy exchange rates in pursuit of economic and strategic objectives.
What the US intervention on the foreign exchange market means
Washington joined Tokyo’s effort to support the yen on July 31. Japan supplied most of the financial firepower, while the American contribution appears to have been smaller but politically potent. The US operation reportedly involved selling euros to purchase yen.
This was a Treasury intervention, through its Exchange Stabilization Fund. It was not a monetary-policy decision by the Federal Reserve, which only executed Treasury-directed transactions as the government’s fiscal agent.
This distinction matters because exchange-rate and monetary policies may pull in different directions. The government may want a stronger yen to limit disorderly capital movements, reduce pressure on US bond yields, or assist a strategic ally. But the yen’s weakness largely reflects the interest-rate gap between Japan and the United States. Supporting it through intervention, while American monetary policy keeps yields high, treats a symptom without addressing the underlying policy mix.
The consequences do not stop at Japan and geopolitics. Selling euros to buy yen directly affects the euro’s exchange rate. Moreover, Japanese sales, or anticipated sales, of US Treasury bills can move American yields, which are transmitted rapidly to European bond markets. Currency movements also change euro-area import prices, competitiveness, and ultimately inflation.
The ECB must therefore incorporate foreign interventions into its monetary-policy assessment even when it was neither consulted nor warned. But the response cannot only be through ECB’s own monetary policy. To maintain an autonomous monetary policy, Europe should be able to respond to exchange rate policy with tools that can potentially isolate exchange rates from monetary policy (although a full isolation can never be achieved in practice).
Does Europe even intervene on the euro’s exchange rate?
Europe has never established a genuine exchange-rate policy. Under Article 127(2) of the Treaty on the Functioning of the European Union (TFEU), conducting foreign-exchange operations is a task of the Eurosystem.
But the political authority lies elsewhere.Article 219 TFEU provides that the Council may conclude formal exchange-rate arrangements. In the absence of such a system, it may “formulate general orientations for exchange-rate policy” on a recommendation from either the Commission or the ECB. The ECB must be consulted, and every arrangement must respect its primary objective of price stability. The EU does not have an Exchange Stabilization Fund, so the implementation will always involve the ECB.
No Council agreement or general orientation has ever been adopted. In this vacuum, the Eurosystem retains the capacity to intervene unilaterally or with other central banks. But capacity is not strategy, and legal possibility is not the same as democratic legitimacy.
The ECB hasintervened in only two historical episodes: to support the newly created euro in 2000, and in the internationally coordinated operation following Japan’s earthquake and tsunami in March 2011. Thelatter was explicitly agreed by G7 finance ministers and central-bank governors. Since then, nothing.
Intervention is not equivalent to fixing an exchange-rate target or an exchange rate agreement. Nor can it permanently override monetary, fiscal, and trade fundamentals. But it can dampen disorderly markets, signal policy objectives, and buy time, especially when coordinated.
Europe should therefore define in advance the circumstances in which intervention might be warranted, the objectives it could legitimately pursue, and the process for coordination among the Council, Commission, and ECB.
The Missing Half of Euro Power
This is also part of the wider debate about the euro’s international role. The ECB cannot internationalise the currency by itself. Europe needs deeper capital markets and a larger supply of liquid, highly rated common debt, a European safe asset capable of competing with US Treasuries. The ECB itself now acknowledges that the euro’s reserve-currency role is constrained by the limited and fragmented supply of such assets.
The contrast is equally stark in the use of central-bank swap lines. The United States and China have built extensive networks that provide foreign central banks with access to their currencies while also serving broader strategic objectives. Europe’s approach remains markedly more cautious: access to ECB liquidity arrangements is narrower and more conditional. Such a network of loans between central banks cannot be treated as an instrument of monetary policy alone; it inevitably carries geopolitical and fiscal implications.
The ECB is right to hesitate before entering this territory without firm political backing from Europe’s legislative and executive institutions. But a major central bank cannot ignore a world increasingly shaped by swap lines and foreign-exchange intervention. A genuinely independent, and democratically legitimate, central bank can operate only under a clear mandate and in close coordination with the other arms of economic and foreign policy.
The United States has both an exchange-rate authority and a deep sovereign-debt market. Europe has a global currency but neither an explicit exchange-rate doctrine nor a comparable common safe asset. In a more interventionist and geopolitical monetary order, that institutional incompleteness is becoming dangerous. The Council and Commission should close the gap before the next crisis forces the ECB to improvise.