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Goldman Sachs note that “the USD’s surge continued late last week, and Chair Powell indicated in remarks to Congress that the Russia-Ukraine conflict is unlikely to dissuade the FOMC from raising rates later this month. However, the sanctions applied by Western governments in response to the invasion could have negative implications for the greenback over the longer-term. All transactions in U.S. Dollars eventually pass through the U.S. financial system, which allows the U.S. government to implement its foreign policy goals through financial sanctions. While this is useful from an American standpoint, it raises concern among many other countries about vulnerabilities created by a heavy reliance on Dollars. For example, after the U.S. applied sanctions on Russia following the annexation of Crimea, the CBR began to “de-Dollarize,” shifting a large portion of its reserves out of the U.S. Similarly, when launching its latest efforts to internationalize the EUR, the EU Commission noted that U.S. use of extraterritorial sanctions represented a “wake-up call regarding Europe’s economic and monetary sovereignty.” While we believe the USD’s international role will not change overnight, there is a risk that aggressive sanctions on Russia - which have essentially cut the country off from Western financial markets - will encourage other countries to diversify foreign exchange reserves and trade invoice currencies away from USD. Because European governments also participated in Russian sanctions, the main beneficiary will likely be CNY; non-sovereign money mediums like gold and Bitcoin may also gain from de-Dollarization efforts. Importantly, the size and liquidity of these markets is much lower than U.S. capital markets, which will likely constrain the pace of any de-Dollarization.”

MNI London Bureau | +44 0203-865-3809 |
MNI London Bureau | +44 0203-865-3809 |

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