The dollar will lose its status as the world’s reserve currency, say experts from one of the largest investment banks JP Morgan Chase, and it will happen very soon. Why are the world’s major financial institutions ready to sign a verdict on the dollar?
Global central banks are driving US currency out of reserves, and US credit policy is capable of finally burying it.
The dollar is losing power
Nearly 62% of global foreign exchange reserves are held in dollars, more than double the total foreign assets denominated in euros, yen and renminbi, according to a recent report by the International Monetary Fund.
However, as pointed out by Jim Glassman, chief economist of one of the main American banks JP Morgan Chase, the accumulation of dollars abroad is now the result of a trade imbalance and an instrument of protection against conditions of erratic market, but in no way a consequence of confidence in the dollar.
Trade imbalances help strengthen the currencies of developing countries, making their exports more expensive on the world market. To prevent this from happening, emerging markets often reinvest surpluses in dollar-denominated assets, such as dollar-denominated bonds traded in US markets.
The analyst recalls that no reserve currency has been eternal. The dollar has dominated the world for nearly a century. Although it is believed to have replaced the pound sterling as the international reserve currency after the signing of the Bretton Woods agreements, this is not entirely true. The value of the pound was undermined long before Bretton Woods, underlines the economist.
The dollar falls back in trading
No wonder the dollar has always been the main currency when it comes to currency trading. Many people use USD/EUR, USD/GBP currency pairs in trading. However, over the past year, the dominance of the dollar has diminished. Various tools such as best indicators for 1 minute chart among others are used by many people to increase the chances of making more money in trading. Considering the fact that the USD can hardly be predicted given its high volatility, such metrics are really handy.
The strength of the dollar has been associated with the creation of the Federal Reserve System, which has fostered more mature capital markets and nationally coordinated monetary policy – the two pillars of reserve currency states.
Ultimately, the dollar acquired this status thanks to the strength of the American economy, but the current situation is in no way conducive to strengthening its position or even maintaining it. The dominant role of the American currency is undermined by the powerful development of Asian economies.
As noted by Jim Glassman of JP Morgan Chase, the main engine of economic growth is now shifting to Asia. At the epicenter is China, which has quadrupled its share of global GDP in 70 years, to almost 20% (the United States has 24%).
In the coming decades, the global economy will shift from being dominated by the United States and the dollar to one in which Asia will have more power. In the currency space, this means that the price of the dollar is likely to fall against a basket of other currencies, including gold.
Dollar falls to a minimum
Data on the foreign exchange reserves of the world’s central banks show a prolonged weakening of the role of the dollar. In 2018, according to the European Central Bank, the US currency’s share of international reserves fell to 61.7% – the lowest in 20 years.
As the ECB notes, the dollar is still the world’s reserve currency, but its leadership has significantly weakened. Since the global financial crisis of 2008, when central banks held the most of the US currency, it has fallen by seven percentage points.
In 2018, developing countries were particularly active in selling US dollars and US government bonds. Russia has become one of the leaders. After the next Washington sanctions, Moscow sold 100 billion dollars and bought nearly 90 billion euros and yuan.
Argentina, China, Hong Kong, India, Indonesia, Thailand and Turkey sold nearly $200 billion worth of Treasuries. Some were in dire need of cash dollars to stabilize their own currency, while others are abandoning US assets due to disputes with Washington.
US regulators admit that the loss of the national currency from world leadership threatens the country with big problems.
The current status of the dollar as the main reserve currency makes it possible to insulate the economy from external shocks.
So far, dollar positions look good. As the famous financier Ulf Lindahl, boss of AG Bisset Associates, which specializes in currency market studies, reminds us, the American currency has remained at record levels for 30 years.
However, Lindahl is convinced that the situation will soon change and the dollar will enter a long-term downtrend. According to the financier, over the next five years, the US currency will depreciate by 40% against the euro.
According to JP Morgan’s calculations, there is no way the Fed will be able to reverse this trend. Ultimately, the dollar will fall for many years. By the second half of next year, we will see a drastic weakening of the national currency, analysts at one of Wall Street’s biggest banks are certain.