Dollar's Reserve-Currency Status Cracks Under Pressure

The dollar's dominance is cracking, and its reserve-currency status is under pressure. The United States recently intervened in currency markets to support the Japanese yen, but instead of selling dollars, it used euros from its reserves. This unusual transaction has raised concerns about the dollar's long-term attractiveness as a reserve currency.

UC Berkeley economist Barry Eichengreen argued that the move pointed toward a deeper concern - Treasury Secretary Scott Bessent and other U.S. officials may have worried that selling dollar securities to support the yen would put additional pressure on the long end of the Treasury market. Higher yields could translate into higher borrowing costs for Washington, which is already spending more than $1 trillion per year on interest alone.

Japan's situation makes the dilemma even clearer. When Japan needs to strengthen the yen, it can sell U.S. Treasury securities, receive dollars, and use those dollars to buy yen. However, Japanese Treasury sales create a headache for Washington, as they can push prices lower and yields higher precisely when the U.S. government needs to borrow enormous sums.

By stepping in to buy yen itself, Washington could accomplish two things at once: support Japan's currency and reduce Japan's need to dump Treasuries. Japanese officials have indicated they will use the Federal Reserve's Foreign and International Monetary Authorities, or FIMA, Repo Facility for future currency-support operations. The facility gives eligible foreign monetary authorities another option - rather than outright selling Treasuries, they can pledge those securities as collateral and obtain dollars from the Fed.

For Maharrey, this is where the story becomes a de-dollarization story. Eichengreen argued that the developments suggest the dollar's status as a reserve currency 'is not what it used to be.' Central banks traditionally hold dollar reserves partly because the Treasury market is deep and liquid, allowing those assets to be bought, sold, and deployed in currency interventions.

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