According to US banking giant JPMorgan, investors betting on the dollar’s dominance may miscalculate. Experts advise them to first assess the key risks associated with the greenback, in particular, escalating tensions between the United States and China as well as political turmoil in the world’s top power.
Earlier, the US authorities used the national currency as a tool to impose economic sanctions on other countries. Their dollar accounts were frozen, and transfers were subject to restrictions. However, now the situation has changed. Many states are trying to move away from settlements in the US dollar and reduce their dependence on the currency.
To date, Russia and China have significantly cut their use of the greenback in bilateral trade. Nearly 80% of trade settlement is now conducted in Russian rubles and Chinese yuan. Other countries have followed suit, adopting a prudent approach towards dedollarization.
JPMorgan warns that a mass transition from dollars to national currencies in international settlements reduces dollar liquidity. In the long term, this could prompt the development of non-dollar payment infrastructure and end up abandoning the use of the greenback. This in turn could lay ground for the adoption of a common single currency for mutual settlements between BRICS group members (Brazil, Russia, India, China, South Africa).
Among non-economic threats to the dollar's dominance, the bank's analysts highlight an intensifying rivalry between the US and China, which they call "Cold War 2.0", as well as rising political instability in the world's most dominant country. However, if these factors intensify, the situation could worsen, thus preventing the US government from managing the national debt. Another important issue is the risk of dedollarization, with China actively introducing new initiatives to reduce its dependence on the dollar.
Preliminary estimates show that Beijing could overtake the United States in terms of GDP within the next 10 years. At the same time, China seeks to make the yuan one of the reserve currencies, but it is a long process.
The adoption of reserve currencies is typically accompanied by serious structural and geopolitical changes. Moreover, it will take the country years and even decades for its national currency to replace the US currency.
However, even the boldest predictions do not imply that the dollar will disappear overnight. The most that may happen is that the greenback will lose its status as the primary reserve currency and a global investment vehicle. In this case, the concept of petrodollars will become a thing of the past, JPMorgan believes.
Despite the high risks that could lead to the greenback's collapse, the bank sees no catastrophic scenario for the US currency.
In the near future, we are likely to witness a multipolar world of key currencies, including the dollar, yuan, and euro, experts predict.
At the moment, the dollar’s hegemony can be attributed to the political dominance of the United States and its highly advanced economy. In addition, the market of dollar-denominated assets remains appealing to major investors. This contributes to an influx of foreign investors who finance the US state budget through government bond purchases. To turn things around, a tectonic shift is needed, analysts at JPMorgan sum up. This process seems to have started which signals developments ahead.
