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Goldman Sachs Warns: U.S. Dollar’s Grip on Global Financial Markets Could Be Over

The U.S. dollar is in danger of losing its status as the world’s reserve currency, the Goldman Sachs Group, Inc. said Tuesday amid Congressional plans for a second round of stimulus payments to shore up the coronavirus-ravaged United States economy.

Strategists from influential global investment banking, securities and investment management firm cautioned that U.S. policy is triggering currency “debasement fears” that could end the dollar’s decades-long run as the dominant currency in global foreign exchange markets.

Already in 2020, the Federal Reserve has swelled its balance sheet by about $2.8 trillion, a report from Bloomberg.com said, as unemployment rates in cities like New York and Los Angeles have approached Great Depression levels.

A “nervous vibe” has infiltrated the market this month, analysts from Goldman say: investors are worried that the increased printing of money will trigger inflation in the years to come, and they are flocking to gold while bailing out of the dollar.

“Gold is the currency of last resort, particularly in an environment like the current one where governments are debasing their fiat currencies and pushing real interest rates to all-time lows,” said Goldman strategists including Jeffrey Currie. There are now “real concerns around the longevity of the U.S. dollar as a reserve currency,” fellow Goldman analysts wrote.

The debate on the long-term effects of stimulus has “gotten louder,” the Bloomberg article said, analyzing the latest Goldman report.

Wall Street’s initial reluctance to sound the alarm on inflation is fading, the article continued, as gold buying has surged to record highs and bond investors’ inflation expectations have begun climbing almost daily, albeit from very low levels.

“The resulting expanded balance sheets and vast money creation spurs debasement fears,” the analysts at Goldman wrote. This creates “a greater likelihood that at some time in the future, after economic activity has normalized, there will be incentives for central banks and governments to allow inflation to drift higher to reduce the accumulated debt burden,” the analysts added.

Break Even Rate Rises Considerably Since March

According to the report the 10-year break even rate, which constitutes the gap between nominal and inflation-linked debt yields, has risen to about 1.51%, over three times the rate of .47% seen in March.

Real yields have subsequently plunged further below zero, to about -.93% on similar-maturity bonds.

The Federal Reserve Bank is also expected to soon link guidance on the policy rate to prices, which would provide some space for inflation to temporarily rise above the central bank’s 2% target.

Concern over the world economy has risen, the Bloomberg report stated, as Goldman raised its 12-month forecast for gold to $2,300 an ounce, up from $2,000. The current value is about $1,950.

Real U.S. interest rates are expected to continue drifting lower, adding to the price of gold even more, Goldman said.

The growing level of debt in the United States, which now exceeds 80% of the country’s gross domestic product (GDP), has boosted the risk that central banks and governments may allow inflation to continue to accelerate. Investors expected to hear more about the Fed’s views on inflation Wednesday.

“Until we get through the Fed, the dollar could strengthen as investors lock in profits,” Edward Moya, a senior market analyst at Oanda Corp. said.

Threat to Dollar’s Global Supremacy Revived by EU Stimulus Deal

Yet another threat to the United States’ status as the world’s primary reserve currency occurred earlier this month as EU leaders agreed to a historic $860 billion recovery fund.

The EU stimulus package greatly enhances the appeal of the shared currency and euro-denominated assets, analysts from Credit Agricole and Muzho International Plc said, according to a report from Business Insider.

The U.S. dollar accounts for more than 60% of the global reserves and is the most widely used currency for international transactions.

The euro accounts for about 20% of global foreign-exchange reserves, Bloomberg reported, and could begin to put a larger dent in the U.S. dollar if inflation continues to rise stateside.

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