Last week's coordinated yen intervention by the United States and Japan was not unprecedented, but the mechanics of the operation exposed underlying fragility in the dollar's global standing, according to prominent currency economist Barry Eichreen.

Writing in a Financial Times op-ed on Tuesday, the University of California at Berkeley economist examined both sides of the joint currency intervention, which he said reflected mutual anxiety over rising long-term yields.

The U.S. Side: Avoiding Additional Treasury Supply

On the American end, the New York Fed sold euros rather than dollar-denominated assets to purchase yen. According to Eichengreen, this approach allowed the U.S. to avoid forcing financial markets to absorb additional Treasury securities at a sensitive moment.

The federal government must finance a $2 trillion budget deficit this fiscal year and is already flooding the market with Treasury debt issuance. Simultaneously, it competes for investor demand against AI hyperscalers issuing massive volumes of their own corporate bonds. This surging supply of both public and private debt, combined with intense competition for capital, has driven upward pressure on yields, which in turn raises interest costs and widens the federal deficit further.

The Japanese Side: Tapping the FIMA Facility

On the Japanese side, Tokyo likewise refrained from selling its Treasury holdings. Instead, it drew on a relatively obscure Federal Reserve mechanism known as the Foreign and International Monetary Authorities (FIMA) Repo Facility, established in March 2020 to restore market functioning during pandemic-driven turmoil. This tool enabled Japan—the world's largest holder of U.S. debt—to borrow dollars against its Treasury stockpile, securing a constrained form of liquidity without offloading the securities outright.

A Signal of Weakening Reserve Status

Eichengreen argued that both governments' reluctance to put Treasuries into the market sends a troubling signal.

"Both moves are an indication that the dollar's status as a reserve currency is not what it used to be," he wrote. "Central banks are accustomed to holding foreign reserves in dollars because markets in U.S. Treasury securities are liquid. Central banks hold U.S. Treasuries because they can be freely bought and sold and used in interventions. But not now, at least not in unlimited quantities."

This strikes at a foundational pillar of dollar dominance, which depends significantly on the immense size and depth of the U.S. Treasury market. By signaling that Treasuries cannot be deployed freely at any time or in any context, the U.S. diminishes the incentive for global investors to hold them. IMF data show the dollar's share of global foreign exchange reserves has declined from roughly 66% two decades ago to under 59% in recent quarters, a gradual erosion that the intervention's optics may accelerate.

"The bottom line is that Washington, fearing the consequences for U.S. financial markets, is reluctant to see foreign central banks use their dollar reserves," Eichengreen concluded. "This is telling us that the dollar is not the attractive reserve currency it once was. When this message sinks in, other countries will redouble their search for more attractive, readily usable alternatives."

Gold's Growing Appeal

Kieran Tompkins, senior climate and commodities economist at Capital Economics, echoed that assessment. In a note published Friday, he argued that by pressuring Japan not to sell dollar assets, the U.S. has inadvertently increased the relative attractiveness of gold.

Central banks have been steadily increasing gold reserves while reducing dollar dependence for years. While some of this shift stems from concerns about fiscal stability, inflation, and geopolitical risk—factors not directly tied to de-dollarization—it also reflects a desire to reduce vulnerability to U.S. sanctions, which leverage the dollar's central role in global transactions.

"Central bank gold buying has slowed this year, but that is likely in response to soaring gold prices caused by speculative momentum," Tompkins said. "However, the ability of central banks to conduct FX operations without triggering concerns from U.S. administrations about the impact on U.S. bond markets could provide fresh impetus to central banks' demand for gold."

Goldman Sachs: A Contrarian View

Strategists at Goldman Sachs pushed back against the de-dollarization narrative. In a separate note, they downplayed concerns that the U.S. would seek to prevent other sovereign debt holders from selling Treasuries in the future. They also argued that Japan's use of the FIMA facility is evidence of dollar strength, not weakness.

"We believe Treasury's actions and the availability and utility of the FIMA facility help demonstrate that no one else can come close to competing with the U.S. dollar's usefulness, network effects, and supporting infrastructure right now," Goldman Sachs wrote.