US and Japan’s yen support hints at waning dollar supremacy

A recent joint effort by the United States and Japan to shore up the yen signals that the dollar’s role as the premier reserve currency may be eroding.

In a recent commentary, Barry Eichengreen highlighted that the New York Federal Reserve purchased yen by selling euros, a tactic that let Washington avoid flooding markets with additional Treasury securities while it finances a $2 trillion deficit. At the same time, Japan accessed the Federal Reserve’s Foreign and International Monetary Authorities Repo Facility, borrowing dollars against its Treasury holdings instead of offloading them.

Eichengreen interprets these steps as evidence that the dollar’s status as the go-to reserve asset is diminishing, prompting central banks to consider gold and other options. Supporting this view, Kieran Tompkins of Capital Economics said the episode boosts the appeal of gold for reserves. Conversely, Goldman Sachs argued the use of the repo tool actually showcases the dollar’s unrivaled network effects. The debate underscores a shifting landscape in global currency reserves.