Apr 18 2024: Morgan Stanley has expressed confidence that the U.S. dollar will maintain its dominant reserve currency status, citing challenges faced by potential alternatives like the Chinese yuan. In a report released on Thursday, the investment firm highlighted several factors contributing to the dollar’s enduring position.
Despite ongoing discussions about alternatives and scrutiny of the dollar’s status due to various geopolitical and economic factors, Morgan Stanley’s analysis suggests that the dollar’s dominance is likely to persist. The report emphasized the dollar’s significant influence in the global economy, backed by strong economic and financial metrics.
While concerns about the U.S. fiscal outlook and the use of economic sanctions could prompt some countries to explore alternatives, Morgan Stanley believes that transitioning away from the dollar is a challenging task. The report mentioned China as a notable competitor but pointed out limitations such as debt, deflation, and demographics that could restrict the yuan’s international appeal.
Morgan Stanley projected a modest increase in yuan reserves by 2030 but noted that the dollar’s role is expected to remain dominant. The report mentioned the potential impact of the upcoming U.S. presidential election on the dollar’s status.
Highlighting the substantial size of global currency reserves, trade volumes, and cross-border lending, the report emphasized that even minor percentage changes could lead to significant nominal shifts.
In terms of market impact, Morgan Stanley suggested that a true loss of dollar dominance could result in higher rates and a weaker currency. However, the investment firm foresees only a moderate and gradual decline in the dollar’s international use, considering factors like multipolarity and low diversification costs for reserve managers.
The report also noted recent strengths in the dollar, driven by factors like sticky U.S. inflation, a resilient economy, reduced rate cut expectations, and heightened tensions in the Middle East. These factors have contributed to the dollar’s short-term strength, reflected in its recent highs against major currencies like the yen and euro.
