Zoltan Pozsar Warns Russian Sanctions Threaten Dollar's Reserve Status

As a result, and following this week's dramatic freeze of the Russian central bank overseas assets, has prompted some to question just why countries build foreign currency reserves at all and, more broadly, whether the unprecedented western response to Russia hasn't jeopardized the dollar's reserve status.

In what one Washington lawyer described to Reuters as the "Biggest hammer in the toolshed", the G7 and European Union governments blocked certain Russian banks' access to the SWIFT international payment system and also went a step further than many expected by paralyzing about half the Russian central bank's $630 billion worth of foreign currency and gold reserves.

While a huge blow for Russia's economy, Reuters' Mike Dolan wrote that the move quickly prompted questions about whether targeting reserve holdings as an act of "Economic warfare" may prompt a rethink by reserve managers across the globe - not least in countries that may be at loggerheads or face a potential conflict with U.S. or EU governments - over where to bank their national stash.

This money is held mostly in U.S. and European government bills and bonds - with the U.S. dollar still accounting for almost 60% of that and the euro about 20%. To be sure, Russia has long been aware of the potential risk involved in holding dollars as reserves, and since the annexation of Crimea in 2014, Russia's central bank had steadily divested its reserves of most U.S. dollar assets.

Is that about to change, and did western sanctions against Russia marked the beginning of the end of the dollar as the world's reserve currency?

Berkeley professor and expert on world reserve management Barry Eichengreen reckons that of the two imperatives behind reserve stockpiling - to intervene or stabilize domestic markets or as a war chest against shocks, disasters or balance of payments crises - the latter may now be in question.

The most surprising take comes from former NY Fed staffer, current repo guru and Credit Suisse money market guru Zoltan Pozsar - who on any other day would be a stalwart advocate of the status quo - and who ominously said that the response to Russia may have set off a sequence of events in motion that eventually leads to the demise of the dollar as the reserve currency.

https://www.zerohedge.com/markets/zoltan-pozsar-warns-russian-sanctions-threaten-dollars-reserve-status