Goldman Sachs stated that in the first month following the outbreak of the U.S.-Iran conflict, the significant strengthening of the U.S. dollar prompted certain foreign official institutions to reduce their holdings of U.S. Treasury bonds. This move aimed to support their domestic currencies and alleviate capital outflow pressures.
Strategist Isabella Rosenberg from Goldman Sachs noted in a report on Wednesday that the U.S. dollar exchange rate is one of the most critical factors influencing the demand for U.S. Treasury bonds from foreign official institutions. Data shows that in March this year, the scale of U.S. Treasury bonds held by foreign official institutions declined from historical highs. Concurrently, the Bloomberg Dollar Spot Index rose by 2.4%, marking its largest monthly gain since July of last year.
Rosenberg indicated that this change is likely related to efforts by some countries to stabilize their domestic currencies amid the backdrop of the Middle East conflict. She pointed out that as the war heightened global risk aversion sentiment, some emerging economies reliant on energy imports faced significant capital outflow pressures. Consequently, central banks were compelled to utilize dollar reserves and sell portions of their U.S. Treasury holdings to support their national currencies.
However, Goldman Sachs believes this phenomenon is more likely to be temporary and does not signify a structural shift in global demand for U.S. Treasury bonds.
Since the U.S. and Israel launched military strikes against Iran at the end of February this year, the U.S. dollar has continued to attract safe-haven capital. Simultaneously, the U.S.'s position as the world's largest oil producer has further benefited the dollar during periods of energy market volatility.
The Middle East conflict has impacted global energy supply chains and reignited market concerns about a resurgence in global inflation. Analysts note that this places considerable pressure on economies highly dependent on energy imports.
According to Bloomberg tracking data, since the conflict erupted, among 31 major currencies, the Japanese yen, South Korean won, Indian rupee, and Turkish lira have been among the worst-performing currencies against the U.S. dollar.
Rosenberg stated that central banks intervening to stabilize exchange rates actually indicates these countries still wish to maintain ties with the dollar system and hold U.S. Treasury bonds over the long term. She wrote, "Actions taken by central banks to defend their exchange rate systems typically signify a continued strong desire to remain linked to the U.S. dollar and to hold U.S. Treasury securities over the long run."
Goldman Sachs further noted that if the Middle East conflict subsides in the future, the U.S. dollar might revert to its previous weakening trend, which would again support increased U.S. Treasury bond purchases by foreign official institutions.
Analysts point out that recent heightened volatility in the U.S. Treasury market is primarily due to investors reassessing the impacts of geopolitics, energy prices, and the Federal Reserve's interest rate path on global capital flows.
Despite short-term potential reductions in U.S. Treasury holdings by some countries due to exchange rate pressures, mainstream Wall Street institutions generally believe that the core status of U.S. Treasury bonds in the global financial system remains difficult to replace for the time being.
Comments