According to a recent note from Bank of America, despite recent concerns about the de-dollarization trend, the US dollar is not in danger of losing its dominance anytime soon. Nonetheless, the bank pointed out that the USD is at risk from domestic fiscal issues, such as the potential for the US to default on its debt obligations. The bank’s analysts stated that the key threats to the USD’s dominant role seem to largely be domestic, instead of competition from other currencies, including a BRICS currency.
The analysts believethat much of the USD’s dominant role comes from standing in front of the US Treasury market. If there were surprise defaults, especially from a debt ceiling showdown, it could compromise the currency’s attractiveness as a store of value. Thus surprising defaults are significant threats to the USD’s dominance, as opposed to competition from other currencies.
U.S. Treasury Secretary Janet Yellen has recently revealed that the Treasury may not be able to pay all of the government’s bills by June 1 “if Congress does not raise or suspend the debt limit before that time.” She also warned that if Congress fails to increase the debt limit, it would cause severe hardship to American families, harm the country’s global leadership position, and raise questions about its ability to defend its national security interests.
Bank of America further cautioned that the long-term risk to the US currency is complacency regarding debts. They noted that, apart from Japan, the US has the highest government debt as a percentage of GDP in the Group of Ten (G10). The International Monetary Fund (IMF) also predicts that the US debt-to-GDP ratio will increase from 122% in 2022 to 136% by 2028.
The use of the Chinese yuan could expand internationally, but to make it a credible reserve currency to replace the USD, Chinese regulators would need to open up its capital account. This could make China vulnerable to outflow volatility and monetary policy interference. Additionally, the Bank of America analysts believe a BRICS currency is unlikely to replace the US dollar as the world’s reserve currency, as it would require cooperation among member countries that have limited trade with one another, aside from China, and whose relations can often be tense.
However, multiple economists still expect a common BRICS currency to erode the US dollar’s dominance. A Swedish university professor recently said that Saudi Arabia joining the BRICS group would accelerate the use of the Chinese yuan as a trading currency.
Despite the potential for the USD to lose some market share among central bank reserves, Bank of America believes there are no viable alternative currencies to the US dollar, and the USD remains the dominant currency in trade, international invoicing, and SWIFT payments. Nonetheless, the bank emphasized that complacencies regarding debts remain long-term risks to the US currency.
In conclusion, Bank of America reaffirms its outlook that the US dollar will remain the world’s dominant currency. Nonetheless, there are significant domestic risk factors that could impact its attractiveness as a store of value, such as the possibility of defaulting on debt obligations. Therefore, the USD’s dominant role seems to be threatened mainly domestically, instead of by competition from other currencies, including the BRICS currency, which requires cooperation among its member countries that have limited trade with one another, aside from China.