Goldman Sachs Warns USD at Risk of Losing its Dominance, Could End Up a Lesser Player Like UK Pound

Goldman Sachs (GS) recently wrote a research report saying the U.S. dollar (DXY) risks becoming a lesser used currency like the UK pound (GBPUSD). The U.S.' tough sanctions on Russia including a freeze of a large portion of the country’s foreign currency reserves have raised concerns prompting countries around the world to become keener to try to move away from the dollar. Goldman also said the U.S.' foreign debts mean that foreign investors may become reluctant to hold dollar assets.

The bank's analysts, including economist Cristina Tessari, said the dollar faces a number of challenges similar to those faced by the British pound at times of its imperial glory before it declined. The pound was once the world's reserve currency, but was supplanted by the dollar after the Bretton Woods Accord paved the way for the US Dollar to become sole world’s reserve currency.

As a clear repercussion, last week Brazil's central bank said it more than quadrupled its foreign reserves in Chinese yuan (CNYUSD) last year, as it trimmed holdings of U.S. dollars and euros and built Brazilian reserves of currency from its biggest trade partner. The Chinese currency, which until 2018 was absent from the forex reserves of Latin America's largest economy, rose to 4.99% of Brazilian central bank holdings at the end of last year, from 1.21% at the end of 2020.

That gave it the third largest share of the central bank's reserves, slightly behind the euro, which fell to 5.04% last year from 7.85% in 2020. Dollar reserves fell to 80.34% of the total from 86.03% a year earlier.