Macquarie Capital’s strategists have highlighted the continued dominance of the US dollar (USD) as the leading currency in global liquidity, highlighting the absence of a viable alternative.
Despite increasing interest in other options such as BRICS currencies and gold, the USD remains the unrivaled leader in transactions, asset valuation and wealth storage. According to Macquarie, all other options are negligible in comparison and often amount to mere rounding errors.
The company points out that the continued strength of the USD, fueled by what they call ‘exceptionalism’ and a potential ‘insanity premium’, poses the biggest risk to the global financial system.
A rapid appreciation of the USD has the potential to put pressure on global liquidity and deflate demand. This scenario could lead to disorderly market liquidations and deprive non-USD economies of much-needed monetary flexibility.
Macquarie underlines the crucial role of the USD in the global economy, pointing to its use in 73% of global non-resident financing, amounting to approximately $13 trillion.
The coin is also responsible for approximately 48% of SWIFT transactions and 88% of foreign exchange trading. Although its share has declined slightly, the USD still accounts for approximately 58% of global reserves.
The strategists argue that no other currency is currently in a position to dethrone the USD because a global currency must be backed by a large stock of securities, freedom from capital controls and the ability to address current account deficits.
Moreover, it requires a credible institution that supports its status and is able to generate liquidity where necessary.
Investors are advised to remain alert, but Macquarie suggests the most likely negative outcome is a reduced ability of emerging market central banks to stimulate their economies without causing instability in the global financial system or asset markets.
Barring significant policy blunders, the company believes the situation should continue to underscore American exceptionalism and secular growth drivers, rather than cyclicality or defensive market strategies.
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