Cracks in Dollar Dominance: Nakaso warns of global shift

Hiroshi Nakaso believes the US dollar will retain its position as the dominant global currency. However, he noted emerging “cracks” in its supremacy, as some investors have started shifting parts of their portfolios into other currencies. This trend became apparent in April following significant outflows from U.S. assets after Trump’s tariff announcement, signalling an erosion of market trust in the greenback. (Source: Reuters)

According to Nakaso, the world is at a turning point where the United States is stepping away from the global economic order rooted in free trade and multilateralism. He argues that President Trump’s policies reflect a growing belief that globalisation has harmed U.S. interests, prompting a shift toward a new order that prioritises national benefit. This transformation raises the risk of global economic fragmentation.

On Japan’s monetary stance, Nakaso suggests that the Bank of Japan will likely refrain from raising interest rates in the near term, due to ongoing uncertainties around U.S. tariffs and global growth. However, once the outlook becomes clearer and the BOJ gains confidence in its economic and inflation projections, he expects the central bank to resume its rate hike trajectory.

Nakaso also flagged emerging inflationary pressures in Japan. He observed that more companies are raising wages and passing on higher costs through price hikes. Notably, food items, which are frequently purchased by consumers, are rising much faster than headline inflation. This, he warned, could lead to an overshoot in inflation expectations if not monitored carefully.

Recalling his experience during the 2008 financial crisis, Nakaso emphasised the continued importance of global institutions like the BIS and the G7 in managing financial shocks. As chairman of a BIS committee, he helped set up the dollar swap lines that stabilised liquidity after the collapse of Lehman Brothers. He noted that the Federal Reserve will still act as a key provider of dollar funding in times of market stress.

While the dollar’s dominance is unlikely to disappear anytime soon, Nakaso believes the trend toward currency diversification will continue over time. For Japan, a cautious but vigilant approach to inflation and monetary tightening will be necessary. Meanwhile, the global financial system braces for long-term shifts as the U.S. redefines its role in international economics.

(Disclaimer: This slideshow has been sourced from Reuters)