2024-05-14 11:50:38
“Which currency would you want to own if global stock markets start to fall and the global economy tends to go into recession?” You’d want to place in dollars because that’s historically been the reaction to these kinds of events.” That’s what James Lord, head of FX strategy at Morgan Stanley, said last week on concerns about a de-dollarization of the global economy.
The value of the dollar as the leading currency of central banks and international trade is unlikely to decline anytime soon, according to Morgan Stanley, cited by Business Insider.
The displacement of a sovereign currency it’s something that happens over decades, economists also previously told Business Insider, as it takes time for people to switch to other currencies once a dominant currency is recognized as “safe”.
Rivals like the Chinese yuan or the Japanese yen or even a common BRICS currency could upset the dollar’s stats, some experts warn, but there are key reasons why the dollar’s dominance isn’t going away anytime soon, strategists said. Morgan Stanley analysts.
“After all, the dollar doesn’t really have any competitors”added Michael Zezas, head of research for the US economy.
The bank pointed out three factors that will keep the dollar as the leading “paper” in the financial markets:
1. The yuan is not sufficiently liquid
The Chinese yuan, which officials in Beijing are trying to establish as a contender for the dollar’s place on the world stage, is not sufficiently liquid to really disrupt the dollar’s dominance, strategic analysts said.
This due in part to China’s strict capital controls on its currencywhich limit the amount of cash that can enter and leave the country.
There are also questions about China’s economy, given the drop in consumer demand and the country’s ongoing real estate crisis.
“China may make some progress in valuing more of its bilateral trade in yuan but the impact this will have on global indicators of monetary dominance I will it’s rather small-scale,” says Lord.
2. Concerns about US debt will not affect the dollar
Anti-dollar risk analysts say confidence in the U.S. currency is waning as concerns grow over the ballooning U.S. debt, more than a record $34 trillion.
However, this has minimal implications for confidence in the US dollar, given the currency’s longstanding reputation as a safe, highly liquid asset.
“I understand the concern, but for the foreseeable future, there is not much to warrant it,” Zezas said.
“Depending on the outcome of the US election, there may be some fiscal easing on the table, but it won’t be anything outrageous in our opinion. And unless we believe the Fed can’t fight inflation – and our economists certainly believe it can – then it’s hard to see the dollar heading for volatility.”
Inflation has fallen sharply from its highs since 2022, despite pandemic-era spending and rising debt levels.
Consumer prices rose just 3.5 percent year-on-year in March, according to the latest inflation report, from a peak of 9.1 percent several years ago.
3. Cryptocurrencies are not a viable alternative
While cryptocurrencies like bitcoin are liquid, at the same time they are too volatile to be considered a real alternative to the dollar, strategic analysts said.
“If I own a cryptocurrency that goes up, say, 10% a month, I’m less likely to use it for trading and will instead store it in my wallet to take advantage of its price increase,” said David Adams, head of G10 FX strategy at Morgan Stanley.
“Now, reasonable people can argue about whether cryptocurrencies are going to appreciate or depreciate, but I would argue that the most ideal outcome for a mainstream currency is neither,” he concluded.
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