By Marc Jones
LONDON (Reuters) – Suggestions that the dollar’s dominance of the global financial system is coming to an end are wide of the mark, JPMorgan said on Wednesday, despite some dramatic signs of change in commodity markets and some trading blocs.
The rise of China and the use of economic sanctions against countries such as Russia mean there is a trend of diversification away from the dollar, JPMorgan said, but the reasons for the US currency’s dominance remain “well-rooted and structural in nature”.
It pointed to rising amounts of dollar-denominated bank deposits in emerging markets, the behavior of sovereign wealth funds and non-reserve foreign assets, saying this “more than offset” the dollar’s long-term decline in emerging markets’ total 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 seemed “exaggerated” despite the geopolitical rivalry.
“A meaningful erosion of the dollar’s dominance is likely to take decades, and the decline in the dollar’s share of global trade and in overall foreign exchange reserves should not be confused with de-dollarization,” the investment bank’s report said.
Areas of significant change include commodity markets where oil trading is increasingly taking place in non-USD currencies and central bank and emerging market consumer demand for gold has soared.
The most “underappreciated risk to USD hegemony” was a possible fragmentation of the international payments system, in which the dollar has long dominated, the bank argued.
China and India are the world leaders in e-commerce innovation and activity, while the US and Western Europe’s share is now less than 30%.
Washington’s use of tough financial sanctions means Russia, China and other countries are building alternatives to SWIFT’s bank-to-bank system.
Dozens of central banks are testing new digital versions of their national currencies, which could also make avoiding the U.S. banking system easier.
“The private sector’s genuine confidence in the dollar as a store of value appears unquestioned,” the JPMorgan report said.
“However, we are witnessing greater diversification and significant shifts in cross-border transactions as a result of sanctions against Russia, China’s efforts to use the , and geo-economic fragmentation.”
