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Market MovesJuly 29, 2020

The Dollar Is in Peril of Getting Knocked Off Its Perch, Goldman Warns

Tumbling value for the greenback could end its status as the world’s reserve currency, the firm’s analysts say.

The US dollar is falling, and Goldman Sachs thinks there’s a danger that the buck will lose its standing as the world’s reserve currency.

Sure enough, the dollar has been on the wane since March 23, when the Federal Reserve, along with the White House and Congress, pushed out vast monetary and fiscal rescue plans. Since then, the US currency has lost 8.8% of its value against a basket of six other denominations.

While Capitol Hill nears passing a new $1 trillion round of stimulus and as the Fed has bought enormous amounts of bonds and other securities (its balance sheet has ballooned to $7 trillion from $4.4 trillion in February), Goldman wonders whether the bloat will end up harming the greenback’s value. These anxieties have prompted “real concerns around the longevity of the US dollar as a reserve currency,” Goldman strategists fretted.

And inflation could ensue, undermining the dollar, Goldman contended. “The resulting expanded balance sheets and vast money creation spurs debasement fears,” the investment bank’s analysts warned. Once the recession is over, they went on, “there will be incentives for central banks and governments to allow inflation to drift higher to reduce the accumulated debt burden.”

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The US dollar has been the world’s reserve currency for decades, which means other nation’s central banks hold it as the ready means to pay debts and propel commerce. If it drastically lost its value, the dollar couldn’t fulfill those functions.

Gold’s latest rally, which has long been a harbinger of economic trouble, and nascent market expectations for higher prices are feeding such worries, the note pointed out. Indeed, the strategists predicted that gold could rise as high as $2,300 an ounce. Already this year, the yellow metal has gained more than 27%, and it closed Tuesday at $1,947. Typically, gold and the dollar are inversely correlated.

Inflation is low right now, but signs are popping up of a possible up-trend, although that likely wouldn’t burst into full view during a recession. The gap between Treasury paper and its inflation-linked cousins has widened threefold lately. Treasury yields are so tiny that, adjusted for inflation, they are negative.

Beyond the Goldman jeremiad—in fairness, the analysts conceded that their dire scenario might not come true—is the coronavirus factor.

Part of the dollar’s fall may be the entirely justifiable perception that the US is in trouble controlling COVID-19. That could translate into a slower economic recovery. The dollar’s skid is “partly driven by a sense that the US is having a harder time controlling the virus than others, which will see the US economy underperform,” wrote Kit Juckes, global macro strategist at Société Générale, in a research note.

Certainly, the death knell has been sounded for the dollar before. It actually was lower at the outset of 2018, amid fears over the US-China trade war. But the buck bounced back.

GOP Senators Introduce Bill Allowing DC Catch-Up Contributions

AMORE Act is intended for those who couldn’t afford to make contributions because of COVID-19.

By Michael Katz

Four Republican senators have introduced a bill that would allow people who can’t afford to make contributions to their tax-advantaged retirement accounts in 2020 to make “catch-up” contributions to their accounts in the following years.

The Addressing Missed-savings Opportunities for Retirement due to an Epidemic Act (AMORE) Act is sponsored by Sens. Ted Cruz, R-Texas; Thom Tillis, R-N.C.; David Perdue, R-Ga.; and Kelly Loeffler, R-Ga.

The AMORE Act would give people the opportunity to compare what they have contributed to their retirement accounts, such as 401(k) plans, 403(b) plans, and individual retirement accounts (IRAs) in 2020 with the legal annual contribution limits on the retirement accounts. The legislation would then allow individuals to make catch-up contributions in 2021 and 2022 that are equal to the difference between their actual contributions and the federal limits on the accounts.

“As we work to get our economy back on its feet and help Americans safely return to work, we must also help ensure this crisis does not result in a permanent detriment to Americans’ retirement savings,” said Cruz. “By allowing catch-up contributions, this legislation will give people the flexibility they need to continue saving for the future.”

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According to conservative advocacy group Americans for Tax Reform, there are an estimated 58 million Americans with a 401(k) plan and 46 million with an IRA.

The bill is the latest in a line of proposed and passed legislation intended to help people bolster their retirement savings. In May, Sens. Ben Cardin, D-Md., and Rob Portman, R-Ohio, introduced the Retirement Security & Savings Act, which includes more than 50 provisions to improve retirement savings, including an incentive for employers to offer generous automatic enrollment plans. It would also increase the current tax credit for small businesses starting a new retirement plan to as much as $5,000 from $500.

And the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was passed into law in December, increases the contribution cap to 15% from 10% for employees enrolled in safe harbor plans, and raises the age at which retirees are required to take their minimum distributions to 72 from 70½.

The SECURE act also created a new tax credit of up to $500 per year to employers to defray startup costs for new 401(k) plans and SIMPLE [savings incentive match plan for employees] IRA plans that include automatic enrollment. And it increases plan portability by allowing qualified defined contribution (DC) plans, section 403(b) plans, or governmental section 457(b) plans to make a direct trustee-to-trustee transfer to another employer-sponsored retirement plan.