FameEX Hot Topics | JPMorgan Evaluates Risk of De-Dollarization and Chinese Yuan's Potential as Reserve Currency

JPMorgan's recent in-depth analysis explores the potential repercussions of de-dollarization and the likelihood of the Chinese yuan challenging the U.S. dollar's dominance as the world's primary reserve currency. Published under the title "De-dollarization: Is the US dollar losing its dominance?" by JPMorgan's Global Research, the report delves into the intricacies of the evolving global economic landscape.

Alexander Wise, a specialist in Strategic Research at JPMorgan, attributes the renewed focus on de-dollarization to shifts in geopolitics and geostrategy. The analysis outlines two scenarios that could disrupt the U.S. dollar's reserve currency status. The first scenario envisions adverse events eroding the dollar's perceived stability and the United States' leadership across various domains. The second factor considers positive developments outside the U.S. that enhance the credibility of alternative currencies, like China's economic and political reforms.

Central to the report is the notion that a credible reserve currency must be secure, stable, and equipped to meet the escalating global demand for liquidity. Wise notes that China's growing role in international trade could gradually elevate the Chinese yuan's standing in the global economy. However, this shift is projected to unfold over decades.

Wise proposes several measures that China could implement to bolster the yuan's credibility. These include easing capital controls, enhancing market accessibility, fostering liquidity, reinforcing the rule of law, mitigating risks tied to appropriation and regulations, and establishing Chinese government bonds as a secure alternative asset. Such measures could position both China and the yuan as credible alternatives to the U.S. dollar.

The report also scrutinizes the oil markets, highlighting the increasing trend of oil transactions occurring in currencies beyond the dollar, including the yuan. This trend challenges the once-dominant influence of the U.S. dollar in shaping global oil prices.

Jahangir Aziz, Head of Emerging Market Economics Research at JPMorgan, underscores the significant decline in the dollar's prominence from 2014 to 2022. Despite these shifts, the report anticipates that while some level of de-dollarization is foreseeable, rapid and widespread de-dollarization is not on the immediate horizon. Instead, JPMorgan suggests that partial de-dollarization is more plausible, particularly with the yuan taking on a greater role among non-aligned countries and China's trading partners. This dynamic could potentially give rise to distinct economic and financial spheres of influence, characterized by various currencies and markets, introducing a new layer of intricacy to the global economic landscape.

Disclaimer: The information provided in this section is for informational purposes only, doesn't represent any investment advice or FameEX's official view.