For years, global investors repeated the same mantra almost mechanically: whenever uncertainty rises, buy dollars. Wars, crises, recessions, banking stress, geopolitical fragmentation, everything ultimately reinforced the supremacy of the US currency. The dollar was not merely a currency. It was perceived as the centre of gravity of the global financial system itself. That assumption is now being tested. The latest signals coming from Japan may appear technical on the surface. In reality, they are potentially far more dangerous for the dollar than most investors currently realise. The Bank of Japan is now openly discussing another rate hike amid accelerating inflationary pressures, driven by energy prices, imported inflation, and the collapse of the yen. Markets already price an 88% probability of a rate increase in June, with further tightening possible afterwards. Meanwhile, Tokyo has already spent around 74 billion dollars defending its currency in only a few weeks.

This matters enormously for the United States. For more than two decades, Japan has been a pillar of global financial stability and one of the largest holders of US Treasuries. The mechanism was simple: ultra-low Japanese interest rates encouraged domestic investors to seek higher yields abroad, particularly in the United States. The famous yen carry trade became one of the structural foundations of global liquidity. Cheap Japanese money financed global assets. But that world was built on one condition: Japanese rates had to remain close to zero forever. That assumption is beginning to disappear. As Japanese yields rise, domestic investors suddenly discover that they can obtain attractive returns at home without taking currency risk. Japanese government bonds, almost irrelevant for years, are slowly becoming investable again. And that creates a dangerous dynamic for the United States. If Japanese institutions progressively reduce exposure to US Treasuries and repatriate capital into yen assets, Washington loses one of its most stable external financing sources precisely when US fiscal deficits are exploding.

The timing could hardly be worse. America is simultaneously facing rising inflation, structurally high oil prices, widening deficits, growing geopolitical instability and increasing refinancing needs. The Treasury market already shows signs of stress. Long-duration bonds remain under pressure. Foreign appetite is weakening. Domestic banks are increasingly constrained. The dollar still benefits from inertia, but inertia is not the same thing as confidence. This is where the situation becomes potentially unstable. The Federal Reserve now finds itself trapped between two contradictory realities. On the one hand, inflation linked to energy, transport, and supply chains is forcing markets to price in higher rates for longer. On the other side, excessively high rates risk destabilising parts of the financial system already weakened by unrealised losses on long-duration bonds. Silicon Valley Bank was not an isolated accident. It was a warning. When yields rise too quickly, institutions holding large portfolios of low-yielding bonds suddenly face massive mark-to-market losses. As long as deposits remain stable, the problem stays theoretical. But once liquidity pressure emerges, those unrealised losses become very real.

The danger is obvious. If some US institutions were forced to raise liquidity rapidly by selling long-duration Treasuries at large losses, the market could face another disorderly repricing similar to 2023, but on a much larger scale. Such a scenario would not only pressure the banking system. It could also trigger a broader loss of confidence in the dollar itself. Because the dollar ultimately depends on confidence in the solvency and stability of the US financial architecture. And this architecture is becoming increasingly fragile. Ironically, the very factors that once strengthened the dollar during crises are now beginning to weaken it. Higher oil prices hurt US consumers. Persistent deficits require ever larger Treasury issuance. Political polarisation paralyses fiscal discipline. Foreign central banks diversify slowly away from dollar assets. And now even Japan,  historically one of Washington’s most reliable financial anchors, is gradually moving towards monetary normalisation.

This is not yet the end of dollar dominance. But it may well be the beginning of the end of unquestioned dollar supremacy. The difference is subtle. Financial history shows that reserve currencies rarely collapse suddenly. They erode progressively, through confidence deterioration, diversification, rising hedging costs and declining relative attractiveness. The market is starting to understand that the United States no longer enjoys the same margin of error it once had. And once that realisation becomes global, the adjustment can accelerate far faster than policymakers expect.