The US dollar will continue to dominate global markets for the foreseeable future, according to Morgan Stanley. Despite ongoing discussions around de-dollarisation, the investment bank highlighted three key reasons why the dollar remains unrivalled.
De-Dollarisation: A Distant Threat
Concerns about the US dollar losing its top spot as the world’s dominant currency have grown. Rivals such as the Chinese yuan, Japanese yen, and a potential shared BRICS currency are often suggested alternatives. However, Morgan Stanley strategists believe these fears are exaggerated.
“Bottom line, King dollar doesn’t really have any challengers,” said Michael Zezas, Morgan Stanley’s head of US public policy research.
Yuan Faces Liquidity Issues
China’s yuan is frequently cited as a contender to the US dollar. However, Morgan Stanley strategists argue the yuan’s lack of liquidity and strict capital controls significantly limit its potential.
“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,” said James Lord, the bank’s head of FX strategy for emerging markets.
Additionally, China’s ongoing property crisis and sluggish consumer demand weaken its economic position, further diminishing the yuan’s viability.
“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.
US Debt Concerns Do Not Threaten the Dollar
The US government’s rising debt, which now exceeds $34 trillion, has raised questions about the dollar’s stability. However, Morgan Stanley argues that the debt level does not significantly erode confidence in the greenback.
“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 — and our economists definitely think they can — then it’s hard to see a channel toward the dollar becoming an unstable currency.”
The Federal Reserve’s success in controlling inflation adds to the dollar’s resilience. Inflation has cooled significantly, dropping from a high of 9.1% in 2022 to just 3.3% year-over-year in May 2024.
Cryptocurrencies Lack Stability
Cryptocurrencies like Bitcoin are often touted as future replacements for traditional currencies. However, their extreme volatility makes them unsuitable as a reliable alternative to the US dollar.
“If I’m holding a crypto coin that rises, say, 10% a month, I’m less likely to use that for trade and instead just hoard it in my wallet to benefit from its price appreciation,” said David Adams, Morgan Stanley’s head of G10 FX strategy. “Now, reasonable people can disagree about whether cryptocurrencies are going to appreciate or depreciate, but I’d argue that the best outcome for a dominant currency is neither.”
Dollar Remains the Safe-Haven Choice
The US dollar remains the go-to currency during global economic uncertainty. Its status as a safe-haven asset is unmatched.
“Which currency would you want to own when global stock markets start to fall, and 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,” Lord explained.
No Viable Alternative in Sight
Experts agree that replacing a dominant currency is a gradual process spanning decades. For now, no alternative currency has the global reach, liquidity, or stability required to dethrone the US dollar.
Morgan Stanley’s outlook underscores the dollar’s enduring position in global markets. While discussions around de-dollarisation may persist, the greenback continues to reign supreme.