Is the Dollar’s Dominance Ending? JPMorgan Says Not So Fast
By Marc Jones
LONDON (Reuters) – JPMorgan has dismissed suggestions that the dollar’s dominance of the global financial system is coming to an end, despite some notable changes in commodity markets and certain trading blocs.
According to JPMorgan, China’s rise and the use of economic sanctions on countries like Russia have led to a trend of diversification away from the dollar. However, the reasons for the U.S. currency’s dominance are still strong and deeply rooted.
The investment bank highlighted the increasing amounts of dollar-denominated bank deposits in emerging markets, sovereign wealth fund behavior, and non-reserve foreign assets as factors that support the dollar’s position. They stated that these factors outweigh the dollar’s decline in overall emerging market FX reserve holdings.
Despite talk of de-dollarization in China and geopolitical tensions, the dollar’s share in total world liabilities continues to grow due to high levels of debt issuance. The report emphasized that any meaningful erosion of dollar dominance is likely to take decades.
Changes are noticeable in commodities markets, where non-USD currencies are being used more for oil trading, and demand for gold from central banks and emerging market consumers has surged. The report also highlighted the potential risk of a fragmented international payments system, which could challenge the dollar’s stronghold in this area.
China and India are leading in e-commerce innovation, while the U.S. and Western Europe’s share has decreased. The report mentioned that countries like Russia and China are exploring alternatives to the SWIFT bank-to-bank system due to tough financial sanctions.
Moreover, many central banks are experimenting with digital versions of their national currencies, which could make bypassing the U.S. banking system easier. Despite these developments, JPMorgan noted that the private sector’s confidence in the dollar as a store of value remains strong.
“We are witnessing greater diversification and important shifts in cross-border transactions as a result of sanctions against Russia, China’s efforts to bolster usage of the dollar, and geoeconomic fragmentation,” the report concluded.
Analysis:
JPMorgan’s report emphasizes that while there are changes happening in the global financial system, the dollar’s dominance is likely to persist for decades to come. Factors such as increasing dollar-denominated bank deposits in emerging markets and the private sector’s confidence in the dollar as a store of value support this view. However, developments in commodities markets and the potential for a fragmented international payments system pose challenges to the dollar’s hegemony. Individuals should keep an eye on these trends as they could impact global trade and cross-border transactions, potentially affecting their finances and investments.