According to analysts at JPMorgan, geopolitical tensions between the world’s two largest economies, the United States and China, could have far-reaching consequences on the global financial landscape. They believe that further escalation of tensions may push the threat of de-dollarization to new heights, eroding the dollar’s supremacy in global reserves and trade settlements.
JPMorgan strategists caution that intensified competition between these powerful nations might give rise to a new Cold War, resulting in global fragmentation and deglobalization in trade and finance. This, in turn, could lead to a scenario of de-dollarization, where the role of the US dollar in the global financial system diminishes significantly.
The analysts point out that besides geopolitical issues, political challenges within the United States could also jeopardize the dollar’s stability during times of financial crisis. An example was seen earlier this year when the US government faced the possibility of its first-ever default due to disagreements over a bipartisan debt ceiling deal. While US politicians debated until the eleventh hour, President Xi Jinping of China enacted market-friendly reforms to bolster China’s economy.
These economic reforms, combined with the potential easing of strict capital controls in China, could pose further risks to the dollar’s dominance. As a result, the Chinese currency may gain market share, especially among nations not economically aligned with the US, contributing to a ” partial de-dollarisation process.”
However, despite the concerns raised by JPMorgan’s market strategists, they view the complete toppling of the US dollar as the world’s reserve currency within the next decade as highly unlikely. The dollar’s status as the primary reserve currency has been entrenched for decades, providing stability and trust in the global financial system.
The escalating tensions between the United States and China present significant risks to the dollar’s global dominance. Geopolitical strife and potential political challenges within the US could set in motion a de-dollarisation process, where the dollar’s role as the world’s primary reserve currency is gradually diminished. While a complete shift away from the dollar is improbable in the near future, the rise of the Chinese currency as a partial contender poses intriguing possibilities for the global financial landscape. As the situation unfolds, market participants and policymakers will closely monitor these developments to assess their impact on the world economy.
