JPMorgan Warns Dollar Dominance Faces Risks From Political Instability

JPMorgan Warns Dollar Dominance Faces Risks From Political Instability – JPMorgan has issued a cautionary statement regarding the potential threats to the U.S. dollar’s dominance, arising from the increasing tensions between the United States and China and the prevailing political instability. The global investment bank’s strategists, including Jan Loeys and Joyce Chang, foresee a scenario of “partial de-dollarization,” wherein the Chinese yuan progressively assumes a more prominent role in global trade. 

The bank has emphasized the need for the markets to consider the possibility of a swift and substantial decline in the U.S. dollar’s status as the preferred global currency for reserves and trade. This warning was included in a report released on Tuesday. They detailed: “If U.S.-China tensions intensify and we get more global fragmentation, it would likely lead to de-globalization in trade and finance. In finance, it could also lead to de-dollarization.”

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The strategists highlighted that the primary factor that poses a threat to the U.S. dollar’s dominance is the political dysfunction within the United States. They issued a warning that this dysfunction might impede efforts to manage the national debt effectively and hinder the government’s ability to stabilize the economy during times of crisis. Recently, the U.S. narrowly avoided defaulting on its debt obligations as politicians engaged in disputes over debt ceiling limits.

Additionally, the JPMorgan strategists underscored the potential risks arising from the escalating rivalry between the United States and China, which they referred to as a potential “Cold War 2.0.” They observed that China’s ambitious economic reforms, including measures such as relaxing capital constraints and promoting market liquidity, could contribute to the erosion of the U.S. dollar’s dominance.

JPMorgan has issued a warning about the potential ramifications across multiple asset classes if there is a shift away from the U.S. dollar or if there are destabilizing shocks to its value. The bank cautions that such a scenario could result in a decrease in the dollar’s worth, leading to lower equity multiples and higher bond yields.

While the strategists believe that the U.S. dollar might lose some of its dominance, they consider it improbable for it to be completely replaced as the primary reserve currency in the next decade. Instead, they envision a more realistic scenario of “partial de-dollarization,” wherein China gradually assumes a more prominent role as an alternative to the U.S. dollar among nations not aligned with the United States.

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Various experts, including S&P Global economist Paul Gruenwald and Nobel laureate Paul Krugman, have also predicted the potential decline of the dollar’s dominance. Krugman recently expressed doubts about the Chinese yuan being able to fully replace the U.S. dollar, stating that while the dollar’s dominance may not last indefinitely, its replacement by the yuan is unlikely.

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