Investing.com — UBS Global Research maintains a positive outlook for the continued dominance of the U.S. dollar as the world’s primary reserve currency. Despite growing concerns about its sustainability, analysts say several factors will support the U.S. dollar’s preeminent status for years to come.
While UBS points to the potential for currency diversification, it highlights the dollar’s deep liquidity, stability, and the stability of global currency systems. Gold is a key diversifier, with central bank purchases and other factors expected to drive up its price.
According to a report by UBS Global Research, the US dollar will remain the cornerstone of the global monetary system for the foreseeable future. This assertion is based on several key factors:
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Fixed global currency systems: Historical precedent suggests that shifts in dominant currencies occur gradually. Despite economic and political changes, the US dollar has maintained its status as the reserve currency.
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Unparalleled liquidity: The dollar’s dominance of global trade, payments, and derivatives markets provides it with an unparalleled level of liquidity, a critical feature for reserve managers.
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Stability and safety: Despite acknowledging the U.S.’s domestic challenges, analysts say the country still ranks high on indicators of institutional strength such as rule of law and market openness. The U.S.’s status as a leader in technological innovation also adds to its appeal.
While the US dollar’s dominance is expected to continue, UBS points to growing pressure for a more diversified currency system. Rising geopolitical tensions, along with efforts by countries such as China to internationalize the yuan, are contributing to this trend.
“Overall, we believe the dollar’s dominance will continue. At the same time, it is likely to give way to competitors along the way,” the analysts say.
However, the brokerage firm believes that these initiatives are still in their early stages, and are unlikely to pose a significant challenge to the dollar’s dominance in the near term.
UBS ranks gold as a key asset for investors seeking to diversify away from the U.S. dollar. Factors such as increased central bank buying, lower U.S. interest rates and a recovery in demand for exchange-traded funds are expected to push gold to $2,600 an ounce by the end of the year. The brokerage also emphasizes gold’s role as a hedge against geopolitical risks, financial concerns and inflation.
Additional Considerations
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Swiss Franc: UBS recommends the Swiss franc as an alternative to the US dollar, citing the Swiss National Bank’s restrictive monetary policy and the currency’s appeal as a safe haven.
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Geopolitical risks: Although rising geopolitical tensions do not directly threaten the dollar’s dominance, they could accelerate the shift toward a multipolar currency system.