Speculations about the end of dollar dominance are exaggerated: JPMorgan

JPMorgan said Wednesday that suggestions that the dollar’s dominance of the global financial system is coming to an end are wrong, despite some dramatic signs of change in commodity markets and certain trading blocs.

According to JPMorgan, the rise of China and the use of economic sanctions against countries such as Russia are leading to a diversification trend, but the reasons for the US dollar’s dominance remain “well-established and structural in nature.”

The bank cited rising dollar-denominated bank deposits in emerging markets, the performance of sovereign wealth funds and non-reserve foreign assets, saying they “more than offset” the decline of the dollar in emerging markets’ reserve holdings.

The dollar’s share of total global liabilities also continues to rise thanks to record debt issuance, and even rumours of de-dollarisation in China seem “exaggerated” despite geopolitical rivalry.

“A significant erosion of dollar dominance is likely to take decades, and the decline in the dollar’s share of global trade and foreign exchange reserves should not be confused with de-dollarization,” the investment bank’s report said.

Among the areas where significant changes are occurring are commodity markets, where oil is increasingly traded in currencies other than the dollar and demand for gold from central banks and consumers in emerging markets has boomed.

The most “underappreciated risk to dollar hegemony” is a potential fragmentation of the international payments system, where the dollar has long been all-powerful, the bank argued.

China and India are the world leaders in terms of e-commerce innovation and activity, while the share of the United States and Western Europe is now less than 30%.

Washington’s use of tough financial sanctions means Russia, China and other countries are building alternatives to the bank-to-bank SWIFT system.

Dozens of central banks are testing new digital versions of their national currencies that could also make it easier to bypass the U.S. banking system.

“The private sector’s genuine confidence in the dollar as a store of value appears unchallenged,” the JPMorgan report added.

“However, we are seeing greater diversification and significant changes in cross-border transactions as a result of sanctions against Russia, China’s efforts to strengthen the use of the renminbi (yuan) and geo-economic fragmentation.”

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