By propping up the yen, the U.S. and Japan are actually admitting dollar dominance isn’t what it used to be, top economist warns
Jason Ma
Sun, August 9, 2026
Last week’s attempt to boost the sagging yen wasn’t the first time the U.S. and Japan took such joint action, but the way they did it revealed weakness in the dollar’s global status, according to a top currency expert.
In a Financial Times op-ed on Tuesday, University of California at Berkeley economist Barry Eichengreen pointed to both sides of the currency intervention, which he said reflected concern about long-term yields going up.
On the U.S. end, the New York Fed sold euros instead of dollar-denominated assets to buy yen. Eichengreen said that allowed the U.S. to avoid calling on financial markets to absorb more Treasury securities.
That’s as the federal government must finance a $2 trillion budget deficit this fiscal year, meaning it’s already issuing a flood of Treasury debt. Meanwhile, it’s also competing against AI hyperscalers who are selling a mountain of their own bonds.
The tsunami of public and private debt as well as the competition for investor demand have put upward pressure on yields, which adds to interest costs and the federal deficit.
On the Japanese side of the intervention, Tokyo also refrained from selling Treasuries and instead tapped an obscure Federal Reserve tool called the Foreign and International Monetary Authorities Repo Facility.
This mechanism allowed Japan, which is the world’s largest holder of U.S. debt, to borrow dollars against its Treasury stockpile, obtaining a limited form of liquidity.
“Both moves are an indication that the dollar’s status as a reserve currency is not what it used to be,” Eichengreen 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.”
That’s strikes at the heart of dollar dominance, which is in part derived from the immense size and depth of the U.S. debt market.
But by signaling that Treasuries can’t be used anytime and anywhere, the U.S. gives investors less of a reason to own them.
“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.”
Kieran Tompkins, senior climate and commodities economist at Capital Economics, echoed that sentiment, saying in a note on Friday that the U.S. is raising the relative appeal of holding assets like gold because it pressured Japan to not sell dollar assets.
To be sure, central banks have been filling up their reserves with more gold for years while relying less on dollars. Some of that is unrelated to de-dollarization, such as concerns about fiscal, inflation and geopolitical risks.
But it’s also due to a desire to reduce vulnerability to U.S. sanctions that leverage the dollar’s ubiquity, eroding another pillar of its dominance—namely, as the top currency for international transactions.
“Central bank gold buying has slowed this year, but that is likely in response to soaring gold prices caused by speculative momentum. 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,” Tompkins predicted.
But strategists at Goldman Sachs made the opposite argument about dollar dominance. In another note, they downplayed the fear that the U.S. might try to prevent other debt holders from selling Treasuries in the future.
And Japan’s use of the Fed’s Foreign and International Monetary Authorities Repo Facility is actually a sign of dollar strength rather than 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 added.
How Scott Bessent used financial engineering to finance the $2 trillion deficit while leaving it untouched—and created a $1.45 trillion shortfall
Sat, August 8, 2026
While investors fixate on the AI boom, a warning from a group of Wall Street bankers whose job is to help the U.S. government borrow went unnoticed.
In minutes released Aug. 5, the Treasury Borrowing Advisory Committee—a panel of senior bond dealers and investors, known as TBAC, that advises the Treasury on its own funding—warned that at current auction sizes, the government faces a $1.45 trillion funding shortfall in fiscal 2027–28.
What that means takes a primer to understand how Washington actually borrows. The Treasury doesn't take out one huge annual loan. Rather, it raises cash by selling debt at regularly scheduled auctions. The shortest-dated IOUs, sometimes called T-bills, come due in a year or less, while the longer-dated notes and bonds—known as "coupons"—run anywhere from two to 30 years.
The T-bills offer Washington, now, a rare opportunity to borrow money on the cheap.
At the time of writing, the three-month bill yielded around 3.8%, while the 10-year Treasury yield sat around 4.6%, and the 30-year at a multi-decade high above 5%. So what Treasury Secretary Scott Bessent has done is lean unusually hard on the cheaper rate today to finance a roughly $2 trillion annual deficit. That holds down reported borrowing costs but leaves the government more exposed to inflation and rising rates.
The committee's own minutes hint at the strain: Rising interest costs drove the biggest jump in Treasury outlays this year, up $120 billion. The government's total debt on interest alone now runs over $1 trillion annually, more than the United States spends on national defense.
That worries Jon Hilsenrath, the veteran Federal Reserve watcher who spent decades at the Wall Street Journal and now runs his own advisory firm, Serpa Pinto Advisory.
"If there are cracks that show up in the financial system over the next few years, I've been expecting them to show up in Treasury debt," he said in an interview. "If you look at any serious financial crisis, all you've got to do is follow the debt." In 2008, that meant mortgages, but today, he argues, "all the growth has been in federal debt."
The even bigger problem, Hilsenrath says, is a collision taking shape with the Treasury and the Fed. Just as Treasury is likely forced back toward longer-term bonds, the Fed under new Chair Kevin Warsh is moving to shrink its own balance sheet. The TBAC minutes note dealers expect the Fed's holdings to drift toward shorter maturities and more bills—and Hilsenrath says a Warsh-appointed new Fed committee, due to report on the balance sheet in December, will almost certainly conclude the Fed is overstocked on long-term Treasuries and must wind them down. So that would mean two waves of long-term supply, converging, with fewer buyers.
"It always comes back to fundamentals," Hilsenrath said. "Trump and a new Congress came into power and chose not to do anything about the deficit."
The strategy, to be clear, didn't start with Bessent. It was Janet Yellen, his predecessor, who first leaned hard on short-term bills to help fund the deficit, and at the time, Bessent was among her sharpest critics. In 2024 he supported and amplified an influential analysis by economists Stephen Miran and Nouriel Roubini that accused Yellen's Treasury of "activist Treasury issuance": flooding the market with bills to hold down long-term yields and flatter the economy ahead of the election. Now Bessent occupies her chair and is doing much the same thing.
For most Americans, the abstraction lands in a concrete place: mortgage rates, which are benchmarked to Treasury yields and sit above 6% while much of the developed world pays closer to something like 4%. Hilsenrath calls Treasury debt "the collateral of last resort in the global financial system," the asset on which nearly everything else is priced. Foreign holders like Japan and China have been slowly diversifying into gold rather than dumping bonds or fully "selling America," he noted—which buys Washington politicians time but keeps deferring the problem.
"We are slowly boiling ourselves like a frog," Hilsenrath said.
This story was originally featured on Fortune.com
U.S. Treasury is paying $3 billion a day in interest on national debt, says the CBO—having spent $10 billion to prop up the currency of its top lender
Eleanor Pringle
Tue, August 11, 2026 at 4:49 AM MDT 3 min read
The government's near-$40 trillion national debt is now costing the Treasury more than $3 billion a day in service payments, according to a new report from the Congressional Budget Office (CBO).
In its August budget update, the CBO reported that net interest on public debt totaled $963 billion between October 2025 (when the fiscal year begins) and July 2026. That equates to $96.3 billion a month, or approximately $3.18 billion a day over the 303 days in between.
Interest payments on the debt have grown by $117 billion—or 14%—compared to the same period last year, the CBO added, on account of the debt being "larger than it was in the first 10 months of fiscal year 2025 and because of higher long-term interest rates." The CBO, led by director Phil Swagel, added: "Declines in short-term rates partially mitigated the overall rise in interest payments."
The latest budget update is further evidence for debt hawks who suggest policymakers are heading in the wrong direction when it comes to fiscal responsibility: Deficits totaled $1.8 trillion in the first 10 months of this fiscal year, $169 billion more than the deficit recorded during the same period last fiscal year.
With that information in mind, the CBO updated its deficit projection for the total fiscal year to $2.1 trillion, $200 billion more than the deficit projected in February of this year.
The value of U.S. debt isn't necessarily a concern for economists—it does, after all, form the basis of the U.S. Treasury market, one of the safest asset classes on the planet. The concern for debt hawks is that the U.S. debt-to-GDP ratio is becoming unbalanced (currently at 122% per the St Louis Fed), and lenders at some stage will attach a higher risk premium to lending, pushing up interest as a result.
While the bull case is that the U.S. can rebalance by boosting economic growth, bearish concerns range from inflation to the crowding out of public investment by interest payments. Bridgewater Associates founder Ray Dalio has warned as much, saying a "debt-induced heart attack" will be prompted by debt payments crowding out public spending.
Bessent's yen move
The CBO report comes after the Treasury's move last week to backstop the Japanese yen. Treasury Secretary Scott Bessent confirmed the move was to help stabilize currency in the region as a whole, telling CNBC: "A stable yen is not only important for the U.S., but very important for the entire region."
The Treasury Secretary had been clear in his intention to support the currency: A photo of Bessent's to-do list from a cabinet meeting at the end of July featured a reminder to buy $5 to $10 billion worth of the currency.
A stable outlook for the Asian—and more specifically, the Japanese—economy is indeed of significant importance to the U.S.: Treasury data confirms Japan is the top holder of U.S. debt. If Japan sold those bonds to buy its own currency, it would drive up yields on U.S. bonds.
The data, updated to May 2026, confirms Japan owns $1.14 trillion in U.S. Treasury securities. Japan has been the top holder of U.S. securities for some time, with its holdings sitting above the $1.1 trillion mark for the past year.
At the time of the intervention, the yen rallied as high as 155 to the dollar, but since then has unwound to approximately 159. Markets had—by and large—expected the move, as UBS's Paul Donovan highlighted in a note to clients this morning: "Policy has not changed, and there is little evidence yen weakness was the result of a speculative attack, so this drift back to market-perceived fair value is hardly surprising."
This story was originally featured on Fortune.com
