Why currency interventions are less effective when carried out by the treasury than by the central bank, unless there is simultaneously quantitative easing

The US Treasury could potentially carry out currency interventions to weaken the dollar, when normally it is the central bank that carries out currency interventions (as has been the case in the past in China and Japan). This makes it important to understand the mechanisms at work: If a country’s treasury carries out currency interventions, it issues debt in its currency and buys debt in foreign currencies. In the case of the United States, investors will hold ex ante more debt in dollars and less debt in other currencies. If they then rebalance their portfolios by selling dollar-denominated debt, the dollar will depreciate; If the central bank carries out currency interventions, it creates money to buy debt in foreign currencies. In the case of the United States, investors will hold ex ante more money in dollars and less debt in other currencies. This gives rise to two concurrent effects: the dollar replaces other currencies in investors’ portfolios (which is the same effect as when the treasury intervenes); and US monetary policy will become expansionary thanks to the additional money creation. As the expansionary monetary policy by itself helps to weaken the exchange rate, currency interventions by the central bank are more effective than those by the treasury; But if the treasury carries out the currency interventions and there is quantitative easing at the same time, then the effect is exactly the same as in the case of currency interventions by the central bank: the bonds (dollar-denominated Treasuries in the case of the United States) issued by the treasury are bought by the central bank, which replaces them with money (in dollars).