The US dollar had a tough summer, falling significantly during August, but JPMorgan believes that those who expect the US currency’s demise are ahead of events.
At 06:00 ET (10:00 GMT), the dollar index, which measures the greenback against a basket of six other currencies, was trading down 0.2% at 101.127, after losing 1.6% over the past month.
“Diversification away from the dollar is a growing trend,” JPMorgan analysts said in a note dated September 4, but we find that the factors underpinning dollar dominance remain firmly established and structural in nature.
The bank added that the role of the dollar in global finance and its effects on economic and financial stability is supported by deep capital markets and liquidity, the rule of law and predictable legal systems, adherence to the free float system, smooth functioning of the financial system for US dollar liquidity and institutional transparency.
In addition, the private sector’s real confidence in the dollar as a store of value seems indisputable, and the dollar remains the most widely used currency across a variety of metrics.
However, JPMorgan said: “We are witnessing greater diversification and important shifts in cross-border transactions as a result of sanctions on Russia, China’s efforts to promote the use of the renminbi, and geoeconomic fragmentation.”
The bank added that the most significant and underappreciated risk is the growing focus on payment autonomy and the desire to develop alternative financial systems and payment mechanisms that do not depend on the US dollar.
JPMorgan (NYSE:JPM) said: “The risks of dollar cancellation appear overrated, but cross-border flows are shifting dramatically within trade blocs and commodity markets, along with a rise in the alternative financial structure for global payments.”
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