Goldman Sachs: The dollar falls, Asian currencies rise, and the renminbi and Singapore dollar will be the most favored

Goldman Sachs pointed out that as central banks around the world seek to diversify their reserve assets and reduce reliance on the US dollar, the South Korean won, Singapore dollar, and Chinese yuan may become the biggest beneficiaries in Asia.

Goldman Sachs analysts Danny Suwanapruti and Rina Jio wrote in their latest report that although the US dollar and euro remain the primary reserve assets, central banks will increase their allocation to Asian currencies as they seek to diversify their reserve assets and reduce dependence on the US dollar. Among them, the South Korean won, Singapore dollar, and Chinese yuan are the most attractive, becoming the preferred currencies for capital flows in Asia. The reasons are:

South Korean won: South Korea is expected to be included in the FTSE World Government Bond Index (WGBI) next year, which means that global central banks will allocate more Korean bonds and thus hold more won.

Singapore dollar: Singapore is a AAA-rated country, already trusted by central banks, with a stable financial market and transparent trading, attracting investments from various central banks.

Chinese yuan: As one of the largest trading nations in the world, the yuan naturally has a liquidity advantage and is a "logical candidate."

The analysts wrote: "We believe that the diversification of investments away from the US dollar should continue, as this trend has been deeply rooted over the past decade."

Is the US dollar still strong? It may be overvalued by 17%

Although the US dollar remains the world's primary reserve currency, its status is beginning to show "cracks."

This wave of "de-dollarization" can be traced back to 2022. At that time, the Russia-Ukraine conflict broke out, and the US froze Russia's dollar reserve assets, severing Russia's ties to the international financial system.

This move raised concerns among global central banks; if even dollar holdings can be frozen, what is truly safe? As a result, central banks are accelerating their search for alternatives to the US dollar.

Now, the uncertainty surrounding Trump's return to power has undermined foreign confidence in US assets, coupled with the oscillation of US fiscal and trade policies, leading to a shift in market risk aversion. The exceptionalism of the US is weakening, and the Bloomberg Dollar Index has fallen more than 7% since its peak in February. Meanwhile, gold purchases have reached new highs, and on the other side, a "diversification movement" for reserve currencies has begun.

Goldman Sachs pointed out that according to its indicators, the US dollar is still overvalued by about 17%. The analysts wrote: "We expect global assets to rotate into other assets, with Asian assets potentially being part of that."