By Mark Jones
LONDON (Reuters) – Suggestions that the dollar’s dominance of the global financial system is ending are off the mark, despite some dramatic signs of change in commodity markets and some trading blocs, JPMorgan said on Wednesday.
JPMorgan said the rise of China and the use of economic sanctions on countries such as Russia meant there was a trend towards diversification away from the dollar, but the reasons for the US currency’s dominance remained “deeply rooted and structural in nature”.
He pointed to the rise in dollar-denominated bank deposits in emerging markets, the behaviour of sovereign wealth funds, and non-reserve foreign assets, saying they “more than offset” the chronic decline in the dollar in emerging markets’ overall foreign exchange reserves.
The dollar’s share of total global liabilities also continues to rise thanks to record amounts of debt issuance, and even talk of de-dollarization in China seems “overblown” despite geopolitical rivalry.
“A significant erosion of the dollar’s dominance is likely to take decades, and the decline in the dollar’s share of global trade and gross foreign exchange reserves should not be confused with de-dollarization,” the investment bank’s report said.
Areas where big changes are taking place include commodity markets, where oil is increasingly traded in currencies other than the US dollar, and where demand for gold has boomed from central banks and emerging market consumers.
The bank claimed that “the most underestimated risk to the dominance of the US dollar” is the potential fragmentation of the international payments system where the dollar has long been the superpower.
China and India are global leaders in e-commerce innovation and activity, while the US and Western Europe now have less than 30% share.
Washington’s use of tough financial sanctions means that Russia, China and other countries are working to build alternatives to the SWIFT interbank system.
Dozens of central banks are testing new digital versions of their national currencies, which 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 seems beyond question,” the JP Morgan report said.
“However, we are seeing greater diversification and significant shifts in cross-border transactions as a result of sanctions on Russia, China’s efforts to promote cryptocurrency use, and geo-economic fragmentation.”