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[SYDNEY] South Korea, Singapore and China’s currencies are likely to be the biggest Asian beneficiaries as central banks look to diversify their reserves away from the US dollar, according to Goldman Sachs Group.
While the greenback and euro remain pre-eminent reserve assets, there’s scope for central banks to boost their allocations to “non-traditional” peers as the US dollar’s dominance continues to ebb, strategists including Danny Suwanapruti and Rina Jio wrote in a note.
The won, Singapore dollar and renminbi are the top candidates for the flows in Asia, according to Goldman. Demand for the won may rise with South Korea on track to join the FTSE World government Bond Index next year. Singapore, which is rated AAA, is likely already attracting central bank investments. China’s trade linkages with the world make the renminbi a “natural candidate” for potential reserve re-allocations.
“We believe the diversification away from US dollar should persist, as this trend has been well entrenched for the past decade,” they wrote.
Central banks are accelerating searches for alternatives to the greenback, jolted in part by sanctions on Russia in 2022 that saw Washington seize US dollar reserves from Moscow and cut the nation off from the international financial system. Jitters around the greenback are amplified even more now as US President Donald Trump’s policies threaten to upend global trade and the world’s economy. They’ve been adding to gold reserves as well, underpinning demand for the metal.
Of course, the US dollar remains the world’s key currency, used for the majority of central bank reserves and for the purchase of commodities like oil, in large part because no significant alternative has emerged. Its central role will not easily be displaced in part because the size of the Treasury market makes it the most liquid in the world, allowing investors to trade large blocks of securities without affecting the price.
However, recent trading across the US$7.5 trillion-a-day foreign exchange market underscores cooling demand for the US dollar: Bloomberg’s greenback gauge has dropped more than 7 per cent since a February peak as US exceptionalism wanes.
The US dollar remains around 17 per cent overvalued based on Goldman’s metrics, the strategists wrote. That is adding to investor worries as US economic policy uncertainty spikes to levels not seen since the start of the pandemic in 2020.
“We anticipate a rotation to other global assets, of which Asian assets could be a subset,” the strategists wrote. BLOOMBERG
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