FX.co ★ Three reasons why US dollar destined to reign

Low liquidity of other currencies, particularly yuan

According to Morgan Stanley analysts, the status of the US dollar as the key currency of central banks intended for international trade will not be affected in the near future. However, Morgan Stanley underscores the growing concern in the global community that the greenback is doomed to failure. Some analysts suppose that competitors to the dollar, such as the Chinese yuan, Japanese yen, or the joint currency of BRICS countries, could challenge the greenback's dominance. Nevertheless, doubts about the dollar’s strength are groundless. Morgan Stanley believes that the dollar’s reign is unlikely to be in jeopardy. As for the Chinese yuan, it is not competitive enough to displace the US dollar. However, Beijing cherishes the dream of positioning the yuan as a competitor to the dollar on the global stage. Yet, experts consider it insufficiently liquid to dethrone the US dollar. The yuan’s weakness is attributed to strict capital controls in China, primarily the limited amount of money that can be brought into and taken out of the country.

Unfounded concerns about enormous US debt

Morgan Stanley is confident that worries about the US huge debt will not affect the dollar’s status as a currency for international payments. However, some economists predict the decline of the dollar era. They warn that trust in the greenback is waning due to mounting concerns about the excessive debt burden of the US. Remarkably, the US government has amassed a debt of over $34 trillion as of today. This is a record-high figure in recent years. However, this situation has had almost no impact on confidence in the US dollar due to its long-standing reputation as a highly liquid safe-haven asset. "In the foreseeable future, there is no reason to worry about the collapse of the greenback. Depending on the outcome of the US elections, there may be some increase in budget spending, but it will not be excessive. Moreover, the Federal Reserve will continue to fight inflation, which will stabilize the dollar," Morgan Stanley predicts. Importantly, nowadays inflation in the US has significantly ebbed away compared to the peak values of 2022 despite the swelling debt. The recent report on US inflation reads that the annual CPI inched up by only 3.5% in March 2024. This is below the record-high value of 9.1% logged a few years ago.

Ineffectiveness of crypto money as global currencies

The third reason for retaining the US dollar as the world’s reserve currency is the absence of serious competitors, experts say. Even the euro has been denied this status. Morgan Stanley is confident that cryptocurrencies also cannot compete with the greenback. Digital assets are not a viable alternative to the US dollar, even though they are quite liquid. This is also true for Bitcoin. "Cryptocurrencies are too volatile to be considered an efficient alternative to the US dollar," Morgan Stanley explains. Experts reckon that it is not profitable for digital coins holders to use them in trading. "They are better off holding virtual money in a wallet to benefit from price growth," Head of G10 FX Strategy Dave Adams at Morgan Stanley notes. Besides, due to the high volatility of the crypto market, it is difficult to predict whether digital assets will go up or down. "The best scenario for the world’s leading currency, which is now the US dollar, is neither one nor the other," Dave Adams clears up the matter. Many economists are on the same page and claim that the greenback will retain its throne shortly. The displacement of the dominant currency occurs over decades, not instantly because a smooth transition takes some time.