Last week\u2019s attempt to boost the sagging yen wasn\u2019t the first time the U.S. and Japan took such joint action, but the way they did it revealed weakness in the dollar\u2019s global status, according to a top currency expert. <\/p>\n
\n
In a Financial Times<\/em> op-ed on Tuesday, University of California at Berkeley economist Barry Eichengreen pointed to both sides of the currency intervention, which he said reflected concern about long-term yields going up.<\/p>\nOn the U.S. end, the New York Fed sold euros instead of dollar-denominated assets to buy yen. Eichengreen said that allowed the U.S. to avoid calling on financial markets to absorb more Treasury securities.<\/p>\n
That\u2019s as the federal government must finance a $2 trillion budget deficit this fiscal year, meaning it\u2019s already issuing a flood of Treasury debt. Meanwhile, it\u2019s also competing against AI hyperscalers who are selling a mountain of their own bonds.<\/p>\n
The tsunami of public and private debt as well as the competition for investor demand have put upward pressure on yields, which adds to interest costs and the federal deficit.<\/p>\n
On the Japanese side of the intervention, Tokyo also refrained from selling Treasuries and instead tapped an obscure Federal Reserve tool called the Foreign and International Monetary Authorities Repo Facility. <\/p>\n
This mechanism allowed Japan, which is the world\u2019s largest holder of U.S. debt, to borrow dollars against its Treasury stockpile, obtaining a limited form of liquidity.<\/p>\n
\u201cBoth moves are an indication that the dollar\u2019s status as a reserve currency is not what it used to be,\u201d Eichengreen wrote.\u00a0\u201cCentral banks are accustomed to holding foreign reserves in dollars because markets in U.S. Treasury securities are liquid.\u00a0Central banks hold U.S. Treasuries because they can be freely bought and sold and used in interventions.\u00a0But not now, at least not in unlimited quantities.\u201d<\/p>\n
That\u2019s strikes at the heart of dollar dominance, which is in part derived from the immense size and depth of the U.S. debt market.<\/p>\n
But by signaling that Treasuries can\u2019t be used anytime and anywhere, the U.S. gives investors less of a reason to own them.<\/p>\n
\u201cThe bottom line is that Washington, fearing the consequences for U.S. financial markets, is reluctant to see foreign central banks use their dollar reserves,\u201d Eichengreen concluded. \u201cThis is telling us that the dollar is not the attractive reserve currency it once was.\u00a0When this message sinks in, other countries will redouble their search for more attractive, readily usable alternatives.\u201d<\/p>\n
Kieran Tompkins, senior climate and commodities economist at Capital Economics, echoed that sentiment, saying in a note on Friday that the U.S. is raising the relative appeal of holding assets like gold because it pressured Japan to not sell dollar assets.<\/p>\n
To be sure, central banks have been filling up their reserves with more gold for years while relying less on dollars. Some of that is unrelated to de-dollarization, such as concerns about fiscal, inflation and geopolitical risks. <\/p>\n
But it\u2019s also due to a desire to reduce vulnerability to U.S. sanctions that leverage the dollar\u2019s ubiquity, eroding another pillar of its dominance\u2014namely, as the top currency for international transactions.<\/p>\n
\u201cCentral bank gold buying has slowed this year, but that is likely in response to soaring gold prices caused by speculative momentum. However,\u00a0the ability of central banks to conduct FX operations without triggering concerns from U.S. administrations about the impact on U.S. bond markets could provide fresh impetus to central banks\u2019 demand for gold,\u201d Tompkins predicted.<\/p>\n
But strategists at Goldman Sachs made the opposite argument about dollar dominance. In another note, they downplayed the fear that the\u00a0U.S. might try to prevent other debt holders from selling Treasuries in the future.<\/p>\n
And Japan\u2019s use of the Fed\u2019s Foreign and International Monetary Authorities Repo Facility is actually a sign of dollar strength rather than weakness.<\/p>\n
\u201cWe believe Treasury\u2019s actions and the availability and utility of the FIMA facility help demonstrate that no one else can come close to competing with the U.S. dollar\u2019s usefulness, network effects, and supporting infrastructure right now,\u201d Goldman added.<\/p>\n<\/div>\n
#propping #yen #Japan #admitting #dollar #dominance #isnt<\/p>\n","protected":false},"excerpt":{"rendered":"
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