JP Morgan said the rise of China and the use of economic sanctions on countries such as Russia meant there was a trend towards diversification away from the dollar, but the reasons for the US currency’s dominance remained “well-entrenched and structural in nature”.
He pointed to rising dollar-denominated bank deposits in emerging markets, the behavior of sovereign wealth funds and non-reserve foreign assets, saying that overall “more than offset” the dollar’s secular decline in emerging market FX reserve holdings.
The dollar’s share of the world’s total liabilities is still rising, also due to record debt issuance and talk of dollarization in China was seen as “exaggerated” despite geopolitical rivalry.
“A meaningful erosion of dollar dominance may take decades, and the decline in the dollar’s share of global trade and overall FX reserve holdings should not be confused with de-dollarization,” the investment bank’s report said.
Areas that are undergoing significant changes include commodity markets where oil is increasingly traded in non-USD currencies and demand for gold from central banks and emerging market clients has picked up.
The most “undervalued risk to USD hegemony” was the potential fragmentation of the international payments system where the dollar has long been powerful, the bank argued.
China and India are the global leaders in terms of e-commerce innovation and activity, while the US and Western Europe now account for less than 30%.
Washington’s use of tougher financial sanctions means Russia, China and other countries are building alternatives to the SWIFT bank-to-bank system.
Dozens of central banks are piloting new digital versions of their national currencies that could also make it easier to circumvent the US banking system.
“The private sector’s genuine confidence in the dollar as a store of value appears unchallenged,” the JP Morgan report said.
“However, we are seeing greater diversification and significant changes in cross-border transactions as a result of sanctions against Russia, China’s efforts to promote the use of the renminbi, and geographic economic fragmentation.”
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