The dollar's global dominance is starting to slip. This was the tell.

By Joseph Adinolfi

Economist Barry Eichengreen sees signs of trouble in last week's joint intervention to support the Japanese yen

One economist sees signs that the dollar's status as the global reserve currency is starting to slip.

President Donald Trump and Treasury Secretary Scott Bessent chalked up last week's historic joint intervention to support the yen as a friendly gesture in support of an ally.

Wall Street analysts later explained that the real motivation was likely to protect the Treasury market, just as volatility was starting to tick higher.

Now, one prominent economist is warning that the specific methods used by the Treasury and Federal Reserve to help prop up the struggling yen send a troubling message about the status of the greenback.

The intervention appears to have given the yen at least a temporary boost, a sign that the joint effort has been more effective than other recent interventions carried out by the Japanese. The currency was changing hands at 158 yen (USDJPY) to the dollar on Thursday, FactSet data showed.

But by selling euros (EURUSD) instead of dollars to help support the Japanese currency (USDJPY) - and by encouraging Japan to use a Fed facility that would allow Japanese authorities to support the yen without directly selling Treasurys - the U.S. is sending a troubling message, according to economist Barry Eichengreen.

For years, central bank reserve managers accumulated Treasurys and other dollar-denominated reserves because these instruments were deeply liquid. The fact that Treasurys could be sold to support a domestic currency was part of the appeal.

But by signaling that it is no longer comfortable with U.S. allies selling Treasurys to support their own currencies, the Trump administration may have - perhaps inadvertently - dented the appeal of Treasurys as a reserve asset, Eichengreen wrote in a column in the Financial Times.

"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. This is telling us that the dollar is not the attractive reserve currency it once was," he wrote.

Eichengreen also wondered what might happen if another country lacking such warm ties with Washington wanted to sell dollar reserves to boost its own currency. Might the U.S. response in that scenario take on a more "Trumpian" form - perhaps a threat to retaliate with tariffs should that other country follow through?

Eichengreen is hardly the first economist to express reservations about recent policy decisions by the Trump administration and their potential ramifications for the buck.

Earlier this year, Mark Sobel, a former Treasury Department official, co-bylined a column in the Financial Times in which he likened the administration's policies to "termites" helping to weaken dollar hegemony at its foundations.

"The dollar's global financing role may decline faster than otherwise because the administration has undermined trust in America as a reliable partner and ally, weakened our institutions and Fed independence, while U.S. fiscal profligacy is building up financial risks," Sobel told MarketWatch via email.

But the dollar still has at least one thing going for it: a lack of viable alternatives. While International Monetary Fund data show that the dollar's share of official foreign currency reserves has shrunk over the past 20 years, in more recent years, the process has flatlined. Moreover, the only currencies that have seen their share of reserves meaningfully grow over the past couple of years are smaller rivals belonging to the IMF's "other currencies" category.

This, combined with the depth and openness of U.S. capital markets, should help the buck maintain its dominant position for the foreseeable future.

Even if its reserve status continues to diminish, that is hardly the only factor behind the dollar's relevance on the international stage. As Sobel noted, at this point the greenback's role in private financing is more important. Its use as a major currency for global payments and securities issuance remains very strong.

Asked by MarketWatch to weigh in, a White House official dismissed the concerns about the dollar's reserve status.

"Suggesting, in one piece, that the United States is undermining global trust among our allies while discussing how the United States is simultaneously helping its longtime ally Japan stabilize its currency is too idiotic to respond seriously to," the official told MarketWatch.

Eichengreen didn't respond to requests for comment from MarketWatch.

-Joseph Adinolfi

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08-06-26 1227ET