- The dollar's dominant role in global reserves and trade is safe, JPMorgan said.
- But the main looming threat is mounting US public debt, the firm said.
De-dollarization is only a problem to the extent that the US allows it to be one, according to a recent JPMorgan research webinar.
One of the main takeaways was that the biggest threats to dollar dominance are swelling US debt levels and fiscal deficits, which officials in Washington could step up to tackle.
"The biggest challenge to US dollar dominance is the US itself given the mounting public debt levels and elevated fiscal deficits," JPMorgan said, in a note summarizing the webinar.
Offshore demand for US Treasury assets reinforces the greenback's international standing, as foreign investors require the currency to snap up US debt. According to the Peter G. Peterson Foundation, foreign holders accounted for 29% of publicly held federal debt in December 2023.
But this can shift if federal debt loses its allure, some caution.
Though Treasurys are attractive for their safe-haven repute, several analysts voiced concern that this is at risk. US spending has shot up since the pandemic, and the current deficit amounts to around 6% of GDP — far more than the 50-year average of 3.7%.
Meanwhile, the latest government projections expect debt-to-GDP ratio to rise from last year's 97.3% to 122.4% by 2034. As this ratio rises, it is harder for the US to service its debt. Stretch this trend even further, and experts have warned that Washington could face a default in as little as 20 years.
Former Treasury economist Mark Sobel — who participated in the webinar — has previously warned that the US must address its "mammoth deficits" to keep fiscal policy manageable. In previous commentary, he cited that this threat will grow under a Trump administration.
"While dollar dominance remains entrenched, both the platform and Trump policies would mean less confidence and trust in American leadership, weakened macroeconomic management and enormous burdens on markets to finance a large supply of Treasuries," Sobel, now the US Chair of Official Monetary and Financial Institutions Forum, said.
In recent years, de-dollarization fears have stemmed from the actions of other countries. Although diversification into other currencies is ongoing, the webinar concluded that warnings of a dollar demise are exaggerated; instead, the greenback maintains its global role as both a reserve and international financing tool.
For instance, many alarmists have focused on the dollar's share in foreign reserve holdings, often pointing out that the foreign central banks have piled into gold as an alternative. But this fixation omits the fact that bank deposits, sovereign wealth fund assets, and other dollar instruments have been on the rise among reserve holdings, JPMorgan said.
"In China's case, it has had an explicit target to bring down dollar holdings in FX reserve but has shifted USD holdings to state-owned entities. China could be under-reporting investment balances by as much as $100bn," the note said.
Webinar experts also noted that the trade-weighted dollar is overvalued by virtually every long-term gauge. The US' robust economy, attractive yields, and large capital inflows have propped up a 30% dollar appreciation over the past decade in trade-weighted terms, JPMorgan said.