Dollar Dominance Cracks Under Pressure from Unusual Intervention

Recently, the US intervened in currency markets to support the Japanese yen, and this unusual move has raised questions about the dollar's reserve-currency status. According to UC Berkeley economist Barry Eichengreen, the Treasury Department may have used euros from its reserves to buy yen without selling dollars, which is a departure from traditional intervention methods.

This approach suggests that Washington is concerned about putting additional pressure on the long end of the Treasury market, where demand for US bonds has been weak. As economist Eichengreen explained, 'the operation blindsided' the European Central Bank, which wasn't informed until after the intervention.

The dollar's reserve-currency advantage is under pressure due to persistent borrowing, spending, and debt accumulation in the US. The Federal Reserve created a facility called FIMA Repo Facility to help foreign institutions obtain dollars without selling Treasuries, but this may have created new challenges for Washington. Central banks are increasingly looking for alternatives to holding US reserves, which could accelerate de-dollarization.

The gold price has remained steady around $4,000 despite interest-rate headwinds and lackluster enthusiasm among Western investors. Capital Economics economist Kieran Tompkins believes that concerns about central bank foreign-exchange operations may boost demand for gold as a reserve asset. Rand Paul's recent visit to Fort Knox, where he confirmed the presence of 147 million ounces of gold, has also raised questions about the government's handling of its gold reserves.