Last week’s joint effort by the U.S. and Japan to bolster the sagging yen was more than a routine currency move. According to Barry Eichengreen, an economist at the University of California, Berkeley, the specific execution of this intervention signals a shift in the dollar's global standing.
Bypassing the Treasury Market
Writing in the Financial Times, Eichengreen noted that the New York Fed sold euros instead of dollar-denominated assets to purchase yen. This maneuver allowed the U.S. to avoid forcing financial markets to absorb more Treasury securities at a sensitive time.
The U.S. federal government is currently financing a $2 trillion budget deficit this fiscal year, resulting in a surge of Treasury debt. This public debt is competing for investor demand against a "mountain" of bonds issued by AI hyperscalers. This dual pressure has pushed yields higher, increasing interest costs and further straining the federal deficit.
Japan’s Strategy and the Appeal of Gold
Japan, the world’s largest holder of U.S. debt, also refrained from direct Treasury sales. Instead, Tokyo utilized the Federal Reserve’s Foreign and International Monetary Authorities (FIMA) Repo Facility. This allowed Japan to borrow dollars against its Treasury stockpile rather than selling it outright.
Eichengreen argues these moves indicate that the dollar’s status as a reserve currency is changing. If Treasuries cannot be freely sold in unlimited quantities for interventions, their primary appeal as a liquid reserve asset diminishes. Kieran Tompkins of Capital Economics suggested this could increase the relative appeal of gold, as central banks seek alternatives less vulnerable to U.S. bond market concerns or administrative pressures.
The Goldman Sachs Counter-Argument
Conversely, strategists at Goldman Sachs interpret the situation differently. They argue that the availability and utility of the FIMA facility actually demonstrate dollar strength. In their view, no other currency can compete with the dollar’s infrastructure and network effects, suggesting that the recent intervention highlights the unique tools available only within the dollar-based system.
