US defends dollar as yen weakness threatens global currency order

Singapore: US treasury's decision to purchase about $10 bn of Japanese yen appears to be an act of munificence to resuscitate a dependent ally's rapidly depreciating currency. It seems in line with other recent dollar-defence interventions, including the $20 bn currency swap line extended to Argentina in October 2025, and the one formalised with the UAE earlier this year.

Certainly, the yen is tottering. A stagnant economy coupled with increased social welfare spending has ruined the exchange rate, presaging high inflation and threatening sovereign debt markets and global supply chains. But this was also a Hobson's choice.

Since Japan holds $1.19 tn of US bonds, a weaker yen would necessitate an interest rate increase by Bank of Japan (BoJ), dramatically reducing the yen carry trade, which allows entities to take out loans in the near-zero Japanese interest rate environment to purchase dollar-denominated bonds and make a handsome profit on the spread. A Japanese rate increase could, therefore, see a substantial selloff of dollar securities, putting additional pressure on the embattled US treasury, which now pays an estimated annual interest charge of more than $1 tn.


And, so, treasury secretary Scott Bessent, who made his fortune as a currency speculator, did what he knows best. Anybody who doubts his motive, or believes that the dollar is not under threat, should simply follow the transaction. Bessent bought over ¥1.5 tn by selling euro-denominated assets to stall further dollar erosion. He has also touted the possibility of allowing Japan to borrow against its bond holdings without liquidating US securities.

But successive currency interventions are an age-old sign of imperial decay. After WW1, Britain, pursuant to the acquisition of sundry German and Ottoman possessions, was at its distended best. But this was not a good thing. Crippled by war debt, Britain's overleveraged position was unsustainable. It quit the gold standard in 1931 and set up the sterling bloc to allow Commonwealth countries to peg their currencies to the pound, share forex reserves, and enjoy access to Britain's capital markets and FTAs.

All to no avail. Between 1931 and 1939, it intervened on behalf of its partner nations continuously through exchange rate controls. It took WW2 and the Bretton Woods system to destroy the pound's supremacy. But it hung on, attempting everything from devaluations to rescue packages, before allowing the pound to float towards oblivion in 1972.

The US may be in the same position as Britain a century ago. This is why Bessent's mediation is unlikely to be the last of its kind. Not only because the sum invested is nugatory, but also because the ruinous US-Israeli war against Iran is now lost. Defeat by itself only implies a loss of face for the US. But Iran's terms - war reparations, unfreezing of assets, lifting of embargoes and demanding the US quit its military presence in the Persian Gulf - will adversely affect the dollar's fortunes.

Also, any US attempt to sanction countries that pay Iran's Hormuz Strait toll could result in economic catastrophe for those that comply, and a serious challenge to the dollar's hegemony for those that choose to buy, say, Chinese renminbi in lieu of gold to compensate Iran. If such a metallic standard were successfully established, dollar's reserve currency status would become untenable.

Under these circumstances, what should India do? As the world's fastest-growing major economy, which has recently augmented its forex reserves by about $37 bn through a foreign currency non-resident (FCNR) scheme, allowing NRIs and PIOs to invest in high-interest-bearing, tax-free, foreign currency fixed deposits, it may feel confident about the future. But these statistics may be a mirage.

For one, India has pegged its fortune to the AI bubble, welcoming investments of $98 bn for 2,117 GCCs and about $20 bn for India Semiconductor Mission. But the success of these initiatives depends on the continued patronage of GCC countries, which could stall if China wins the AI war, or fail if the petrodollar is rendered unnecessary.

If India's growth slows, and rupee's exchange rate against dollar deteriorates further, its ability to pay back its loans, including those linked to FCNR, will become onerous. Also, by associating with the losing side, it faces the prospect of dealing with China, Russia and Iran as distinct, but closely allied, big powers. Not only is it uncertain how many concessions - toll waivers from Iran, cheap Russian oil in the face of US sanctions, Chinese rare earth imports, etc - India will enjoy from this 'triple alliance', but it's also unclear how India's global standing will be challenged.

India's best bet, therefore, may be to repair relations with its neighbours, and work with BRICS+ to challenge US hegemony and ensure the economic chaos unleashed by the current war is never permitted again.