US sanction risk hits dollar reserve currency status

By Mubasher

The drop in the US dollar’s share in foreign reserves in the world’s central banks as shown by the latest figures, was probably impacted by Washington’s moves against Russia.

The greenback’s holdings in global central bank reserves dipped to 62.3% in the second quarter of this year, as shares of euro (EUR), yen (JPY) and yuan (CNY) each gained ground, the International Monetary Fund’s (IMF) estimates showed last September.

Sanction risk seemed behind a notable portion of the observed drop in US assets, Goldman Sachs’ co-head of global foreign exchange (FX) and emerging market strategy Zach Pandl said in a note on Monday.

US President Donald Trump has counted heavily on the use of unilateral tariff hikes and sanctions in diplomacy, affecting countries from Iran to China.

The Central Bank of Russia (CBR) likely sold around $85 billion of its $150 billion US assets over the second quarter of this year and “perhaps all of its US Treasuries held by US custodians and transferred them to euro-denominated and yuan-denominated bonds,” Pandl noted.

This came after the US imposed sanctions against businessmen and government officials in Moscow last April.

While the second-quarter shift in the foreign reserve proportions may be a temporary change, it revealed risks to the extent of dominance that the US dollar continues to hold in global foreign reserves originating from sanctions, the Goldman’s analysis showed.

“The dollar’s share of reserve assets could decline further if other large reserve holders were to make similar changes as the Central Bank of Russia over time,” he said.

This article provided by NewsEdge.