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Dollar in danger of losing reserve currency status


29 July 2020

Goldman Sachs Group Inc. put a spotlight on the suddenly growing concern over inflation in the U.S. by issuing a bold warning Tuesday that the dollar is in danger of losing its status as the world’s reserve currency.

With Congress closing in on another round of fiscal stimulus to shore up the pandemic-ravaged economy, and the Federal Reserve having already swelled its balance sheet by about $2.8 trillion this year, Goldman strategists cautioned that U.S. policy is triggering currency “debasement fears” that could end the dollar’s reign as the dominant force in global foreign-exchange markets.

While that view is clearly still a minority one in most financial circles — and the Goldman analysts don’t say they believe it will necessarily happen — it captures a nervous vibe that has infiltrated the market this month: Investors worried that this money-printing will trigger inflation in years ahead have been bailing out of the dollar and piling furiously into gold.

The Goldman report makes clear that Wall Street’s initial reluctance to sound the alarm on inflation back when the pandemic began is fading. Having been burned badly by ominous forecasts of runaway price gains following the fiscal and monetary stimulus that followed the 2008 financial crisis, many analysts have been hesitant to repeat such calls now, especially as the economy sinks into a deep recession.

But with gold surging to record highs and bond investors’ inflation expectations climbing almost daily, albeit from very low levels, the debate on the long-term effects of stimulus has gotten louder.

Gold’s record-breaking rally highlights growing concern over the world economy. Goldman raised its 12-month forecast for gold to $2300 an ounce from $2000 an ounce previously. Meanwhile, the Bloomberg Dollar Spot Index is on course for its worst July in a decade. The drop comes amid renewed calls for the dollar’s demise following a game-changing rescue package from the European Union deal, which spurred the euro and will lead to jointly issued debt.

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