Dollar Dominance Cracks Amid Unusual Intervention

Recent intervention by the United States to support the Japanese yen has raised questions about the dollar's reserve-currency status. The U.S. Treasury reportedly used euros from its reserves instead of buying yen directly with dollars, which would have put downward pressure on the greenback.

This unusual transaction has sparked concerns that selling dollar securities to support the yen could weaken the long end of the Treasury market, making it more expensive for Washington to borrow.

UC Berkeley economist Barry Eichengreen argued in the Financial Times that this move pointed toward a deeper concern: the dollar's status as a reserve currency is not what it used to be. Central banks traditionally hold dollar reserves because the Treasury market is deep and liquid, but if foreign central banks face pressure not to sell their Treasury holdings, why hold reserves at all?

Gold is seen as an alternative to the dollar, with some economists predicting that central bank gold demand could increase due to concerns about U.S. officials' interference in foreign-exchange operations.