According to Morgan Stanley, the dollar status as the leading currency of central banks and for international trade likely will be around for a while.
The investment bank pointed to worries that the US dollar could eventually be dethroned as the world’s top-held and most widely used currency. Rivals like the Chinese yuan, the Japanese yen, or even a shared BRICS currency could disrupt the dollar’s stats. Some commentators have forewarned, but Morgan Stanley strategists said there are pivotal reasons dollar dominance isn’t going away anytime soon.
“Which currency would you want to own when global stock markets begin to fall? Also, when the global economy tends to head into recession. You want to be positioning in US dollars because that has historically been the exchange rate reaction to those kinds of events.” James Lord, the bank’s head of FX strategy for emerging markets, said in a podcast last week.
“Bottom line, King dollar does not have any challengers,” Michael Zezas, the firm’s head of US public policy research, added.
The firm indicated three factors that will keep the dollar’s status at the top in financial markets:
Capital Controls Cripple Yuan’s Challenge to Dollar Dominance
China’s yuan, which Beijing officials have been trying to position as a challenger to the dollar on the world stage, isn’t liquid enough to truly disrupt the greenback’s dominance, the strategists said. That’s partly due to strict capital controls on China’s currency, which limit the amount of cash that can be taken in and out of the country.
“It seems unlikely to challenge the US dollar meaningfully anytime soon. To do so, we think China would need to relax control of its currency and open the capital account. It doesn’t seem likely that Beijing will want to do this anytime soon,” Lord said.
Given sagging consumer demand and the nation’s ongoing property crisis, questions also linger over China’s economy.
“China may make some progress in denominating more of its bilateral trade in US dollars, but the impact that that has on global metrics of currency dominance is likely to be incremental,” Lord added.
Dollar Doubters Debunked
Dollar doomsayers say trust is waning in the greenback as concerns mount over the US’s rising debt balance. As of this year, the government has racked up over $34 trillion in debt, a record amount.
Yet, that has little impact on trust in the US dollar, given the currency’s long-running reputation as a highly liquid safe-haven asset.
“I understand the concern, but for the foreseeable future, there’s not much to it, ” Zezas said. “Depending on the election outcome in the US, there’s some fiscal expansion on the table, but it’s not egregious in our view, and unless we think the Fed can’t fight inflation. Our economists definitely think they can. Then it’s hard to see a channel toward the dollar becoming an unstable currency.”
Inflation has cooled dramatically from its highs since 2022 despite pandemic-era spending and mounting debt levels. According to the latest inflation report, consumer prices grew just 3.5% year-per-year in March, down from a peak of 9.1% several years ago.
Is Crypto’s Volatility A Hurdle to Dollar Dominance?
While cryptocurrencies like bitcoin are liquid, strategists say they are too volatile to be taken as a true alternative to the dollar.
“If I’m holding a crypto coin that rises, say, 10% a month. I am less likely to use that for trade. Instead just hoard it in my wallet to benefit from its price appreciation,” David Adams, Morgan Stanley’s head of G10 FX strategy. “Now, reasonable people can disagree about whether cryptocurrencies are going to appreciate or depreciate. I’d argue that the best possible outcome for a dominant currency is neither.”
Other economic experts have also dismissed the possibility of the dollar being toppled from its dominant status anytime soon. Economists previously told Business Insider that displacing a dominant currency happens over the course of decades. It takes time for people to shift to other currencies once a dominant currency is recognized as “safe.”
