US Treasury Secretary Janet Yellen reiterated that currency intervention should be a seldom-used tool that officials give fair warning about when they resort to it.

Speaking in the Italian lakeside resort of Stresa, the former Federal Reserve (Fed) chief - who was present in 2017 when the Group of Seven’s (G7) current formulation on exchange rates was devised - responded to a question on how countries like Japan can respond to the strength of the dollar.

“We believe intervention should be rare, when it occurs it should be communicated in advance, and if it occurs it should largely be in response to volatility in currency markets,” Yellen said. “Intervention is not a tool that we think should be used in any routine way at all.”

Exchange rates don’t appear to be a specific concern at the G7 meeting of finance ministers set to convene in Italy, though diverging monetary policies loom large at a time when the Fed seems likely to keep borrowing costs higher than originally envisaged. Against that backdrop, the Bank of Japan is suspected to have intervened recently after the yen weakened to a 34-year low.

Unless officials seek to revisit prior talks on the matter, they may resort to their habitual wording in the communique for release on Saturday, where they refer to their 2017 commitments to “market determined exchange rates and to consult closely” on currency matters.

“As a general matter the view that we’ve expressed, that the Biden administration has expressed on exchange rates, is that it’s appropriate for large market economies to have market based exchange rates and that movements in exchange rates to a large extent reflect differences in fundamentals across countries,” Yellen said.

She also observed that the level of the US currency is a reflection of how investors perceive the trajectory of borrowing costs.

“On the strong dollar, this partly reflects interest-rate differentials and market views on the likely paths of interest rates in different economies,” she said. 

  - Bloomberg