The US helping Japan prop up the yen shows why the dollar is so hard to replace, Goldman Sachs says

US-Japan's yen intervention highlights the dollar's enduring appeal as a global reserve currency, Goldman Sachs says.

Illustration by Sheldon Cooper/SOPA Images/LightRocket/Getty Images

• The US and Japan's rare joint intervention has raised questions about the dollar's reserve appeal.
• Goldman Sachs says the episode actually highlights why dollar reserves remain so useful to central banks.
• Deep US markets let central banks build dollar reserves in calm times and access them in a crunch.

The Treasury's efforts to help Japan strengthen the yen aren't a reason for central banks to rethink their dollar reserves, according to Goldman Sachs.

If anything, the rare joint intervention in the Japanese currency highlights one of the dollar's biggest advantages: Central banks can readily access their dollar reserves when markets get rough, Goldman analysts said in a note on Thursday.

The comments come amid concerns that Washington's more hands-on approach to the Treasury market could make reserve managers less comfortable holding dollar assets. Goldman said that concern is misplaced in Japan's case.

Goldman said the argument hinges on an assumption: that the Treasury's willingness to help Japan sell Treasurys today means it could be willing to stand in the way of another reserve manager trying to sell in the future.

"This seems like quite a leap," the bank's analysts wrote.

The concerns have emerged as the US and Japan have stepped up efforts to support the yen, which was trading around 158 against the dollar late Thursday, compared with roughly 164 before the intervention last week.

The coordinated intervention with the US followed months of yen weakness that pushed the currency to a 40-year low.

Treasury Secretary Scott Bessent has proposed increasing the limit on the Federal Reserve's Foreign and International Monetary Authorities (FIMA) repo facility, which allows foreign central banks to temporarily raise dollars against their Treasury holdings rather than selling those securities outright.

That could help reduce disruption from sudden Treasury sales.

However, Goldman's analysts said they are "far from persuaded that Treasury's intervention signals new fragilities in the Treasury market relative to before."

Instead, it just shows that the current US administration is "more willing to intervene than in the recent past."

Goldman said the episode illustrates a broader advantage of dollar reserves: The depth and liquidity of US capital markets make it easier for central banks to build up dollar reserves in normal times and access them when markets come under stress.

However, the dollar still faces longer-term risks to its dominance, Goldman said, including uncertainty around US institutions.

But Japan's experience underscores an advantage rival reserve assets struggle to match.

"When it comes time to intervene, most central banks still need Dollars," Goldman's analysts wrote.

Read the original article on Business Insider

from Business Insider https://ift.tt/9ZbIHtw