America's political dysfunction, conflict with China pushing dedollarisation: JP Morgan

For long, the dollar has been the world’s reserve currency, but its dominance is now under threat as more countries are joining the growing list of nations that want to shun the US currency and trade in their local money.

Recent years have witnessed acceleration in trend towards de-dollarization with countries looking out for alternatives to reduce their reliance on the dollar.

But what could be the key factors that may lead to de-dollarisation?

JP Morgan said there are possibly two factors that could threaten the dollar’s dominance and markets are not pricing in it.

Factors that could lead to de-dollarisation:

1 – Political dysfunction: The political dysfunction in the US could block efforts to manage the national debt, “preventing a government from stabilising the economy during a crisis due to fiscal constraints”

2 – Increasing competition between US and China: The other factor could be intensifying competition between the US and China. “If US-China tensions intensify and we get more global fragmentation, it would likely lead to de-globalisation in trade and finance,” JP Morgan said, adding “In finance, it could also lead to dedollarisation.”

According to the International Monetary Fund (IMF), the US dollar share of international reserves fell to 58 per cent in 2022 from 73 per cent in 2001.

However, the US dollar continue to be the dominant reserve currency.

Meanwhile, the BRICS nations – Brazil, Russia, India, China, and South Africa – will be meeting between August 24 and 26 and the group is planning to introduce a common trading currency backed by gold.

The anti-dollar drive is being led by China which is promoting the use of its own currency yuan in trade. The global central banks have now been using a record amount of yuan via currency swaps.