Ex-BOJ deputy chief Nakaso sees ’cracks’ in dollar’s supremacy TOKYO (Reuters) -The dollar will retain its supremacy as a key global currency but "cracks" appearing in its status will prod investors to continue diversifying into other currencies, said former Bank of Japan Deputy Governor Hiroshi Nakaso. On Japan’s monetary policy, Nakaso said the BOJ is likely to resume interest rate hikes once uncertainty over the impact of U.S. tariffs on the economy diminishes. The global economy faces an increased risk of fragmentation due to President Donald Trump’s policies, which seem driven by the recognition that globalisation did more harm than good to the U.S., said Nakaso, who retains close contact with domestic and overseas policymakers. "We are, in this regard, at an inflection point where the U.S. is trying to replace the global economic order" based on free trade and multilateralism, with a new one "that better serves its national interest," Nakaso told Reuters in an interview on Monday. Nakaso said the greenback’s supremacy will not be overtaken anytime soon as "no other currency at this point can substitute the U.S. dollar," adding that the Federal Reserve will stand ready to provide dollar funding in times of market stress. "However, what we witnessed in April shortly after the ’Liberation Day’ was that cracks have appeared in the almighty dollar," and a sign some investors have shifted part of their portfolios away into other currencies, he said. "This diversification trend may continue over the longer run." As chairman of a BIS committee on market operations, Nakaso took part in the creation of a dollar swap line to address a liquidity crunch after the 2008 collapse of Lehman Brothers. Global forums like the Bank for International Settlements (BIS) and the G7 group of advanced economies will continue to play a key role in times of financial crises, he said. Trump’s announcement of sweeping tariffs on April 2, which he described as "Liberation Day", triggered a huge outflow of funds from U.S. assets in a move some analysts saw as eroding market trust over the dollar. Markets have restored some calm as Trump de-escalated his trade war including by signing a trade deal with Japan this month, which led to lower tariffs for its mainstay automobiles. With uncertainty still high, the BOJ will likely hold off raising rates for now to scrutinise the hit to Japan’s economy from U.S. tariffs and slowing global growth, Nakaso said. "But once the uncertainties clear enough for the BOJ to restore confidence that the economic and inflation trajectory will move in line with their projections, I think they will be back on their way to the next rate hike," he said. Nakaso also said there were upside risks to inflation, as firms have become more keen to raise wages and pass on rising costs through price increases. " Food products (TADAWUL:2100) that people buy more frequently are rising much quicker than the headline inflation rates. This runs the risk of inflation expectation overshoot," he said. Even with another rate hike, Japan’s monetary conditions will remain loose as inflation-adjusted borrowing costs are still negative, Nakaso said. A career central banker with expertise on financial markets, Nakaso served as deputy BOJ governor from 2013 to 2018. He is currently chairman of Japan’s Daiwa Institute of Research.

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Challenge to dollar supremacy a long way off, central bankers say By Francesco Canepa and Balazs Koranyi SINTRA, Portugal (Reuters) -There is no prospect of a major challenge to the dollar’s status as the world’s reserve currency of choice any time soon, central bankers gathered for an annual conference in the Portuguese resort of Sintra said on Tuesday. U.S. President Donald Trump’s unpredictable economic, trade and security policies have spurred questions over whether the U.S. currency, which accounts for 58% of the world’s reserves, can remain at the centre of the global monetary system. European Central Bank President Christine Lagarde, who has argued the euro could over time become an alternative to the dollar if Europe’s currency zone enacted necessary reforms, said 2025 could in future be viewed as "pivotal" in this respect. "(But) for a major change to occur it will take a lot of time and a lot of effort," she told a panel with her U.S., British, Japanese and Korean counterparts. She noted that "investors are looking at options" in a climate characterised by uncertainty and unpredictability and that there was evidence that the euro was benefiting from that. "It’s not going to happen just like that overnight. It never did historically," she said. "But there is clearly something that has been broken. Whether it is fixable, or whether it is going to continue to be broken - I think the jury’s out." Bank of Japan Governor Kazuo Ueda also noted that any significant change would depend on structural reforms. "It’s to a certain extent up to what areas like Europe or China will do in terms of improving the efficiency or convenience of their currencies," he said, citing as an example the efforts at capital market integration in the euro zone. Bank of England Governor Andrew Bailey said any change to the dollar’s status was a long way off. "I don’t see ... a sort of a major shift at the moment," he said, arguing that any reserve currency had to offer a supply of safe assets into the market that can be used for purposes of collateral and security. Bank of Korea Governor Rhee Chang-yong said the prospect of a long-term shift of the dollar sentiment was a subject of discussion for some even as they retained their dollar holdings. "It looks like people are talking about it. But at this moment they keep the dollar share while increasing their hedging ratio," he told the panel. Lagarde told a recent audience in Berlin that there was an opening for a "global euro moment", if it earned it. While the dollar’s current share of international reserves is the lowest it has been in decades, its 58% tally is still well above the euro’s 20% share.

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