Last week, the United States and Japan jointly intervened to support the weakening yen, a move that reveals weakness in the dollar’s status as a reserve currency, according to Barry Eichengreen, economist at UC Berkeley. The New York Fed sold euros rather than dollar-denominated assets to buy yen, while Japan used the Fed’s repo mechanism (FIMA Repo Facility) instead of selling U.S. Treasuries, despite being the world’s largest holder of American debt. This approach demonstrates that Washington fears the consequences on its financial markets of massive Treasury sales, while the federal government must finance a budget deficit of $2 trillion this year. For Kieran Tompkins of Capital Economics, this American pressure on Japan is pushing other central banks to increase their gold reserves rather than dollars. Goldman Sachs, however, takes the opposite view, arguing that the FIMA mechanism actually demonstrates the unmatched strength and utility of the dollar.
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