Title: Goldman Sachs Warns of Potential US Dollar Reversal Amid Shifting Global Dynamics
Source: Originally reported by EconoTimes, authored by Naveen Athrappully
Link: https://www.econotimes.com/Goldman-Sachs-Flags-US-Dollar-Reversal-Risk-Amid-Global-Shifts-1716538
Goldman Sachs, one of the largest investment banks in the world, has raised concerns about the sustainability of the US dollar’s dominance as global financial and economic landscapes continue to evolve. According to a recent report, strategists at Goldman Sachs have observed growing risks that could lead to a long-term reversal of the dollar’s value, which has generally been on an upward trajectory in recent years.
Several key macroeconomic trends and transformations in global markets play a role in contributing to these risks. A weakening of the dollar, should it occur, could have widespread implications for international markets, commodity prices, emerging economies, and investor portfolios worldwide.
Below is an in-depth analysis of Goldman Sachs’ warning and the factors influencing their perspective.
Global Structural Shifts Challenge Dollar’s Strength
For decades, the US dollar has served as the dominant reserve currency and the benchmark for global trade, accounting for a large proportion of foreign exchange reserves, trade settlements, and cross-border transactions. However, according to Goldman Sachs, multiple structural and geopolitical shifts are creating new vulnerabilities for the dollar’s position. These include:
• Changing interest rate expectations: As inflationary pressures begin to ease, expectations for additional rate hikes by the Federal Reserve are waning. Simultaneously, central banks in other regions are becoming more aggressive in tightening monetary policies.
• De-dollarization efforts by major economies: Countries such as China, Russia, and members of the BRICS bloc are working actively to reduce their reliance on the dollar. These nations are pursuing initiatives such as bilateral trade agreements denominated in local currencies and increasing their gold reserves as alternatives to dollar holdings.
• Rising geopolitical fragmentation: A series of global crises and tensions, including the war in Ukraine, the US-China rivalry, and polarized trade relationships, are eroding trust in centralized systems and encouraging a multipolar currency environment.
• Domestic fiscal challenges: The growing burden of US federal debt, coupled with persistent budget deficits and the political impasse on fiscal reforms, has led to concerns about the long-term viability of US government creditworthiness.
Goldman Sachs analysts emphasize the importance of these longer-term transitions, noting that while the dollar remains resilient in the short term, it may face declining demand in the coming years as market participants diversify their holdings and seek alternative assets.
Short-Term Strength vs. Long-Term Pressure
At present, the US dollar continues to demonstrate strength, particularly against currencies from economies facing their own challenges. This includes the Japanese yen, which remains historically weak due to the Bank of Japan’s ultra-loose monetary policy, and several emerging market currencies affected by slower economic recovery and political instability.
Nevertheless, Goldman Sachs argues that this short-term resilience does not negate the mounting pressures building in the medium to long term. The investment firm identifies several factors that could trigger a reversal in the dollar’s trajectory:
• Slowing US economic growth: While the US economy has performed better than expected post-pandemic, signs of a slowdown are emerging, especially in housing, manufacturing, and consumer spending. As economic momentum stalls, safe-haven demand for the dollar may wane.
• Potential Fed policy pivot: If inflation continues to trend downward, the Federal Reserve may shift away from its current hawkish stance. Lower US interest rates would reduce the appeal of dollar-denominated assets, particularly for yield-seeking investors.
• Global monetary policy convergence: As other major central banks, such as the European Central Bank and Bank of England, continue to raise interest rates, the interest rate differentials that have favored the dollar may shrink.
• Valuation asymmetries: Some analysts view the dollar as overvalued relative to historical norms and purchasing power parity benchmarks. A correction in
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