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Michael Kern

Michael Kern

Safehaven

Michael Kern is a newswriter and editor at Safehaven.com, Oilprice.com, and a writer at Macro-Investing.com.

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The U.S. Dollar Is Losing Ground As A Reserve Currency

Dollar

That equities market rally that has investors giving stocks some really good days and blatantly ignoring the economic elephant in the room is now growing even stronger on the back of the declining momentum of the U.S. dollar. 

In fact, the dollar, which is down some 9% from March, is declining to the point that Goldman Sachs says its status as the world’s top reserve currency is now under serious threat. 

Goldman strategists are now raising “real concerns around the longevity of the US dollar as a reserve currency”, propping up gold as “the last currency of 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”, as reported by Bloomberg. 

Political uncertainty ahead of November elections and a resurgence of COVID cases and simmering suggest the Fed may pile on more risk for the dollar by shifting toward an inflationary bias. The Fed has signalled that it will keep rates near zero for years

It’s something Michael Brown, senior analyst at Caxton payments firm, explains as a self-fulfilling prophecy. 

“The weaker dollar is almost becoming a self-fulfilling prophecy, with gains for risk assets seeing the dollar weaken further, fueling additional gains,” Brown told Reuters.

One need look no further than the price of gold versus the dollar to support Goldman Sachs’ warning.

Right now, the dollar is working towards its worst month since 2011. On Tuesday, the dollar index against a basket of currencies gained 0.18% to 93.71, but only after dropping to 93.47 on Monday, the lowest since June 2018. And analysts see plenty more weakness ahead. Since there was no real driver for the 0.18% rebound, the general assumption is that it’s a tiny rally ahead of biggest losses.

Gold, on the other hand, closed at its highest level ever on Monday at $1,942.55 an ounce, with Goldman Sachs revising its 12-month forecast to $2300 per ounce--or a 20% gain.

But everyone’s bullish on gold.

UBS has a $2,000 price target on gold for the end of September, while Deutsche Bank is targeting $2,000-$2,100. JPMorgan has a $2,000 price target, and Bank of America says $3,000 by the end of 2021. 

Next up, the Fed is set to deliver its latest decision Wednesday, and it could result in another boost for gold as US real interest rates move lower. 

On Wednesday, it is widely expected that the Fed will hold interest rates steady, but all eyes will be on Powell’s conference ahead of that. Instead of any concrete move by the Fed, it will be a game of dissecting every word that comes out of Powell’s mouth. 

“The stakes will be high in terms of Powell’s press conference,” Ernie Tedeschi, head of fiscal analysis at Evercore ISI, told the Washington Post. “He’s going to be characterizing the way the Fed is thinking about the economy, with all of this added uncertainty in the next couple of weeks. … I would really like to hear the Fed’s perspective on how they’re processing it.”

By Michael Kern for Safehaven.com

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