Unprecedented euro sell-off signals new front in US threats to EU

For eight decades, the US dollar has stood as the bedrock of the world’s financial architecture – devised at Bretton Woods following World War II. It is a system that inherently advantages the US at the expense of others. Europeans have accepted this imbalance, which Charles de Gaulle called “the exhorbitant privilege”, in exchange for a stable and predictable system. But this deal relied on Washington remaining a trusted partner that took financial decisions in coordination with its Western allies. Last week, we saw definitive evidence that this system is collapsing. And a new one, far more aggressive toward America’s “partners”, is being born.

The US intervened to save the falling Japanese yen in the last days of July, not out of the goodness of their hearts as claimed by Donald Trump on 2 August (“They wanted a little bit of help, and we’re always there for Japan,”) but because they were worried the Bank of Japan would sell US treasuries in order to save the yen. The Trump administration in panicking because US treasury bond yields recently hit a 19-year high as they have come under continued sustained pressure due to the erratic policy coming out of the White House. And Japan is the largest foreign holder of US government debt.

But rather than using dollars to bail out Tokyo so they didn’t cash in their US bonds, the US used the euros that they hold. Selling euros let Washington thwart a Japanese bond sell-off without the risk of further inflation that would have come with selling dollars. Most alarming - they did not inform the European Central Bank before doing so, according to a new report by the Financial Times. It is the first time in history that the US has sold a European allied currency without informing its central bank first, and it has left European financial officials shellshocked. “This has never happened before,” one EU source involved in the discussions (or lack thereof) told the FT, bemoaning a situation where “decades of close co-operation between western central banks that fostered financial stability and economic growth may have come under threat.”

So far, the European impulse when being surreptitiously attacked by the US (or other sensitive partners) has been to deny that they were attacked. That was certainly the case last week when EU home affairs ministers refused to investigate the possibility that Morocco instigated the Ceuta crisis, for fear of upsetting an indispensable partner in managing migration. But this time that didn’t happen. When asked whether the ECB had been consulted about the euro selloff, rather than lying in order to pretend there was no problem, the bank admitted to the FT that they had not been consulted and were blindsided by the move. That prompted the Trump administration to lash out, telling the FT: “we respect the confidentiality of private discussions with our international counterparts, unlike the ECB”.

The big question is whether this was a one-off or part of a new normal – what some are calling “Bretton Woods 2.0” – where the US government unabashedly uses the dollar’s dominance as a tool of control and extortion. The evidence, as well as internal documents from the White House, indicate that it is.