JPMorgan predicts weakening dollar dominance

US Dollar 100 banknote and statue of liberty with cracks

JPMorgan has stated that the market is unable to prevent the decline in the dollar's supremacy.

The US currency is being threatened by the political instability in the US and the possibility of a new Cold War.

Paul Krugman and Robin Brooks, two economists, have a differing viewpoint.

According to JPMorgan, the market does not accurately portray the potential risks of a "fast and deep" decrease in the dollar's status as the preferred reserve currency for global reserves and trade.

Bloomberg warns that investors may be disregarding the potential dangers of increasing political unrest in the US and intensifying tensions with China. As a result, the dollar may be overvalued.

The bank warned that if the US and China's tensions continue to rise, it could result in de-globalization and fragmentation of trade and finance, leading to an increase in de-dollarization. Furthermore, the competition between the two countries could potentially develop into a second Cold War.

China's economic reforms, such as loosening capital controls and increasing market liquidity, could potentially challenge the U.S. dollar's global dominance.

Conversely, increasing political volatility in the US could impede attempts to increase the debt limit, which could also endanger the dollar's long-term supremacy.

It is possible that political brinkmanship may become more frequent in a nation that is becoming increasingly divided.

The International Monetary Fund (IMF) has reported that the dollar's share of international reserves has dropped from 73% in 2001 to 58% in 2022, despite its continued status as the dominant reserve currency.

The imposition of U.S. sanctions on Russia has prompted China, Brazil, and other countries to reduce their reliance on the dollar for trade and investment, sparking a debate about whether this de-dollarization would weaken the dollar's status as the global reserve currency.

Economists Paul Krugman and Robin Brooks have both stated that the hegemony of the dollar is not in any danger.

Paul Krugman, a Nobel laureate, recently declared that the "de-dollarization hype" is much ado about nothing. He argued that the dollar is still the dominant currency due to the lack of viable alternatives.

Robin Brooks, chief economist at the Institute of International Finance, stated that the idea that sanctions weaken the dollar is completely false. In fact, the dollar has increased in value by 21% against the G10 currencies and 37% against the currencies of emerging economies over the past decade, which shows the dollar's strength and dominance, not its weakness.