By Rhod Mackenzie
J P Morgan, the largest US bank, believes that investors who bet that the US dollar will continue to reign supreme in the global financial system do not take into account a number of factors. The main ones, writes Bloomberg, are the growing political instability in the United States and a sharp aggravation of relations with China. The bank's analysts argue that markets underestimated the risk of the dollar's "rapid and deep" loss of global currency status, what is now commonly referred to as "de-dollarization."
“If tensions between the US and China escalate even further and we get even more fragmented globally, this will likely lead to deglobalization in trade and finance,” wrote JPMorgan analysts led by Ian Loyce and Joyce Chan. “In finance, this could lead to de-dollarization….”
The most powerful and obvious factor threatening the long-term dominance of the American currency, banking analysts consider political instability in the United States, which is quite capable of even frustrating efforts to manage the multi-trillion-dollar national public debt and stabilize the economy.
This year, political divisions between Democrats and Republicans have already jeopardized a rise in the national debt ceiling. If the Democrats and Republicans did not agree at the last minute, this could have lead to a government shutdown and a full-blown crisis. America is becoming more and more politically divided. Consequently, such situations will be repeated more and more often, and this will certainly weaken the position of the dollar in the international arena.
The same situation now exists around relations between Washington and Beijing, which for many decades have not been as bad as they are now, and which could provoke a Cold War 2.0. The dollar is also threatened by the reforms that Xi Jinping is now pursuing in China.
Despite the rather difficult situation for the greenback (the July sell-off of dollars), the likelihood that the euro or the yuan will replace it as a world reserve currency over the next ten years is estimated by JPMorgan analysts as very low. They consider not full, but partial de-dollarization much more likely. The dollar will most likely be challenged by the yuan, the currency of the planet's second economy, which has already surpassed the American economy in an impressive number of positions. Yuan is steadily expanding its foothold in the international arena. So far, however, mainly in developing economies.
The dollar, obviously, will remain a reserve currency for quite a long time, but the figures unambiguously indicate an obvious trend towards its weakening: the share of the dollar in international foreign exchange reserves decreased, according to the IMF, from 73% in 2001 to 58% in 2022. So far, however, the US currency retains its dominant position in sovereign funds.
As for investors, JPMorgan advises them not to invest, as before, all their funds in dollars and US stocks and long-term bonds. The bank recommends that investors now bet more on the shares of the value of American companies, i.е. stocks that are not overpriced. The shares of such companies should show good results against the backdrop of rising interest rates.
This article originally appeared in Russian at expert.ru