3 reasons the dollar can't be dethroned as the world's dominant currency, according to Morgan Stanley (2024)

FAQs

What factors could threaten the dollar's dominance in the future? ›

Dollar doubters have speculated that rising prices, U.S. sanctions and increasing non-dollar trades could begin shifting more commodity transactions away from the dollar. However, any such shift is likely to be gradual. Most commodities, including oil and gas trades, are still invoiced in dollars.

Despite the US dollar's strength as a reserve currency, there is a long-term trend of the greenback giving ground to other currencies. Since the turn of the century, the US dollar has lost around 10 percentage points of its share of global foreign exchange reserves².

USD Remains Dominant in International Transactions

According to the Bank for International Settlements (BIS), over 88% of foreign exchange transactions involve the dollar on one side of the trade (Exhibit 2).

The dollar's dominance tracks with the ascent of the US as a global superpower following World War II. Since then, investors have relied on dollars — and assets denominated in them, such as US Treasuries — to be among the best places to stash wealth, in both good times and in bad ones.

There are conceivable scenarios that might cause a sudden crisis for the dollar. The most realistic is the dual threat of high inflation and high debt, a scenario in which rising consumer prices force the Fed to sharply raise interest rates.

A strong dollar is hurting exports, helping imports and expanding the trade deficit.

Currency depreciation, in the context of the U.S. dollar, refers to the decline in value of the dollar relative to another currency. Easy monetary policy by the Fed can weaken the dollar when investment capital flees the U.S. as investors search elsewhere for higher yield.

Dollar/yen weakened after data showed U.S. producer prices increased less than expected in July as a rise in the cost of goods was tempered by cheaper services, indicating that inflation continued to moderate.

A weakening dollar implies several consequences, but not all of them are negative. A weakening dollar means that imports become more expensive, but it also means that exports are more attractive to consumers in other countries outside the U.S. Conversely a strengthening dollar is bad for exports, but good for imports.

The dollar's status as the top currency of central banks and for international trade probably isn't fading soon, according to Morgan Stanley.

Why is the dominance of America's currency harder than ever to overturn? ›

The extensive use of the USD in international trade, finance, and investment has created a self-reinforcing cycle that is difficult to break. Many countries and businesses prefer the stability and liquidity of the dollar, making it the currency of choice for cross-border transactions and reserves.

A strengthening U.S. dollar means it can buy more foreign currency than before. For example, a strong dollar benefits Americans traveling overseas because $1 buys more; however, this would disadvantage foreign tourists visiting the U.S. because their currency would buy less.

Dollar dominance—the outsized role of the US dollar in the world economy—has been brought into focus recently as the robustness of the US economy, tighter monetary policy and heightened geopolitical risk have contributed to a higher greenback valuation.

There has been a long-term trend toward currency diversification in global financial transactions and trade, but we don't see the U.S. dollar losing its dominance any time soon.

US dollar (USD)

Issued by the Federal Reserve (Fed), the US dollar is the official currency of the United States. It is the number one most traded currency globally, accounting for a daily average volume of US$2.9 trillion. There are several reasons for its popularity.

When investors earn more money from better yields (higher interest payments on the currency), it will attract investment from global sources, which may push the U.S. dollar higher for a while. Conversely, a weak dollar occurs during a time when the Fed is lowering interest rates as part of an easing monetary policy.

We expect 2024 to be a year of diverging trends for the dollar. It will likely move lower on a broad trade-weighted basis early in the year but stabilize as the year progresses. Although we expect a general downward drift for the dollar, performance of individual currencies will likely vary widely.

Inflation is another key indicator of the declining value of the US dollar. If the Federal Reserve decides to print more currency, the value of the dollar decreases and raises the price of goods and services. The more this happens, the quicker the dollar could collapse.